Are we nearing one of those major, nerve-racking turning points in financial markets when asset prices swing wildly as investors are forced to re-examine the fundamental assumptions of their investment strategy?
The fear that US inflation – long assumed to be comatose – could finally be showing signs of life sent shivers down investors’ spines overnight. The concerns were triggered by the release of figures that showed US producer prices rose way more than expected in October, resulting in the biggest annual increase in wholesale inflation in more than five and a half years.
The US producer price index (PPI) increased 0.4 per cent in October, wrong-footing most economists who had been tipping a 0.1 per cent rise. The stronger inflation rise – which lifted the year-on-year increase in the US PPI to 2.8 per cent – reflected a big jump in the cost of services, as well as higher prices for pharmaceutical and food prices.
Although the PPI is not the primary measure of US inflation, October’s strong reading suggests that price pressures are building in the US production pipeline, and that it could be just a matter of time before these are reflected in higher US consumer prices.
This would confirm a key prediction of Tim Toohey, the highly regarded former Goldman Sachs economist who joined Ellerston Capital’s new global macro fund this year.