A recent article from Bloomberg indicated that inflationary pressures are starting to build. PPI metrics in the US and China are starting to show that producers are facing higher prices. Now, passing that on to consumers is not always a simple process but the way of the world is that the more things cost to produce, the higher prices will tend to be. These are certainly inflationary pressures. There is also the new problem of rising wages. Some industries were reporting difficulty in filling jobs. Harder to fill jobs means higher wages, and higher wages mean higher costs. Again, inflationary pressures. The latest CPI data out on Wednesday this week showed one of the highest inflationary readings for the US since the 1980s. See chart below:
The recent strong rise in commodities is also an inflationary pressure. The rise in price of raw materials makes products more expensive and that will have inflationary tendencies.
Inflation can be deflationary
Ok, so how can an inflation risk actually be deflationary? Tracy Alloway, the Executive Editor of Bloomberg, makes a good point regarding this.
Ok, so commodities are rising, as are transport costs, supply shortages, and the possibility that wages could start to rise all push the cost of finished goods higher. But, here is the problem. The resultant price rises reduce demand and create a bottleneck as consumers may be unwilling to pay higher prices. Therefore, the impact can be deflationary. The immediate reaction to the spike higher in inflation is anticipation that the Fed will taper their bond purchases sooner. This lifted US 10-year yields and the USDJPY pair higher. If US 10-year yields keep moving higher then we can expect further gains in USDJPY. Look at the close correlation of the US 10-year yield and the USDJPY pair below.