LONDON (Reuters Breakingviews) - The wait for inflation to pick up has been long and littered with false dawns. Investors are starting to signal hope that the coming year may bring succour.
Market measures that track how U.S. consumer prices will behave in the coming decade are rising. One gauge, the inflation break-even for 10-year Treasury Inflation-Protected Securities, which tracks the difference between inflation-linked bonds and the nominal kind, on Tuesday rose to just over 1.8%, the highest since May 2019. Another, which tracks inflation expectations in the second half of the coming decade and is called the five-year/five-year forward, neared 2.3%, also the highest in a year and a half.
What investors think will happen and how things actually pan out can differ wildly. But there are three reasons why it makes sense to expect a pickup in U.S. inflation in 2021. First, vaccines will in the coming year help restore some semblance of normality to life and unleash pent-up demand. True, the poorest have been hard hit and are struggling to make ends meet. But many U.S. households have cash burning a hole in their pocket. Personal savings as a proportion of disposable personal income has fallen back from a record high of nearly 34% in April but was still at an elevated 13.6% in October. The average for the decade to the end of 2019 was 7.4%.
Second, policymakers are intent on delivering a robust recovery. U.S. President-elect Joe Biden’s pick for Treasury secretary, Janet Yellen, on Tuesday said urgent action was required to avert a self-reinforcing downturn. And the former Federal Reserve boss can rely on her successor at the central bank, Jerome Powell, to keep monetary policy ultra-loose. Central bankers everywhere are circumspect and likely to react quickly to bad economic news while treating good news with caution. That’s particularly true of Powell, who this year said he will tolerate inflation higher than 2% for a while, and target the labour market more aggressively.
Third, the pandemic already has or will put some companies out of business. When more money chases fewer goods, prices are supposed to go up. Together, these forces could make 2021 the year when inflation finally makes a comeback.
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