US inflation spike in March?

13 Apr 2021 Written by: Redaksi OCBC NISP

Currently, the Fed's inflation target measure is still running below the 2% target of 1.4% YoY for February.

What about the inflation data for March? Investors have been waiting for this week, with US inflation data for March due out on Tuesday.

Inflation concerns have been a concern lately, especially with the relaxed lockdown and vaccinations allowing activities to emerge from the pandemic. This will force the Fed to start raising interest rates earlier than expected. The expectation of an increase in inflation put US Treasury yields on a strengthening trend and pushed the 10-year tenor yield to rise from the beginning of the year at 0.90% to more than 1.70%. The market looks worried that the Fed will soon raise its interest rate from the current level of 0.00-0.25%.

Bloomberg consensus estimates that US inflation for the March period will be at 2.5% annually and monthly at 0.5%. The inflation rate is expected to increase due to the effect. This is because consumer prices fell sharply in March 2020 at the start of the pandemic. Thus, when March inflation is released for this year, consumer prices will be much higher than a year ago (YoY), causing the inflation rate to rise significantly. This base effect will make the inflation rate above the Fed's target of 2%.

However, the full employment rate was also a target of the Fed, not just a 2% inflation target. The US economy still has a very high number of unemployed people, as well as millions of jobs lost since the pandemic. Therefore, we see that the Fed will not raise interest rates soon.

Investment Strategy:

Inflation data estimates that are above 2% have the potential to increase US Treasury yields. However, according to Bloomberg analyst consensus, the yield on the 10-year US Treasury will still be at a low level, namely 1.86% in the fourth quarter of 2021.

The release of improved economic data will encourage higher return, as the US economy continues to recover and puts the risk on markets, where risky assets are an option. The increase in the US Treasury certainly had an impact on the movement of the Indonesian bond and stock market. Thus, this volatility can be used to buy or averaging when bond and stock prices weaken.


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