×

Markets are getting it wrong on rising inflation, economist warns

  • Inflation has been a major factor in how markets have performed.
  • Data releases earlier this month have pushed up sovereign debt yields and even fueled an equity market sell-off.

Market participants have distorted expectations on how much consumer prices will change in the future, an economist told CNBC Thursday.

Inflation has been a major factor in how markets have performed. Stronger-than-expected labor data in the U.S. as well as consumer prices have been interpreted as a sign that inflation is about to pick up at a fast pace after years of moribund growth. Such data releases earlier this month have pushed up sovereign debt yields and even fueled an equity market sell-off.

"A market that reacts negatively to a 2.9 percent wage increase and record-low unemployment is a troubled one," Daniel Lacalle, chief economist at Tressis Gestion said in a note, referring to official data in February that showed an increase in hourly wages in the previous month. "That is not bad for anyone," he said about higher wages.

Speaking to CNBC Thursday morning he added that "inflation expectations in consensus are overblown, are too high even considering the wage numbers in January."

Minutes released Wednesday from the last Federal Reserve meeting showed that policymakers expect inflation to "move up to the… 2 percent objective over the medium term as economic growth remained above trend and the labor market stayed strong."

Markets have once again interpreted this as a sign that a sudden increase in inflation could be around the corner. U.S. sovereign yields hit session highs on the minutes, with the 10-year Treasury yield seeing a return to its recent four-year highs.

But Lacalle warned Thursday that "disinflationary pressures (which are a short-term slowdown in prices) are much stronger trends than those small commodity driven inflationary pressures that we have seen in the short term."

Headline inflation in the U.S. hit 2.1 percent in January, above expectations suggesting a 1.9 percent increase. Lacalle told CNBC that such a headline figure was mostly due to higher energy and food price increases.

"No consumer ever has benefitted from rising food and gas or power prices. And, again, it shows a worrying fixation of economists with higher inflation at any cost, even if it is negative for consumers," he said in a note.