Inflation expectations as priced by the Treasury market are hitting 18 month highs just now. As the reader can see, inflation expectations across all treasury maturities are at cycle highs. This is happening coincident with growing expectations for the $908bn bipartisan stimulus deal and widespread expectations that the Fed will ease in some additional way at their next meeting 12 days from now. That these two events are anticipated by the market does pose some near-term downside risk for inflation expectations, since there is now room for disappointment. Even still, keeping the long game in mind is useful. Indeed, there exist multiple structural catalysts for inflationary pressure that haven’t existed in quite some time:

  1. de-globalization
  2. USD which may be under continued pressure from massive twin current account and budget deficits
  3. the possibility that US oil production has peaked, or at least will not grow as it did last cycle
  4. raw material (especially base metal) inflation from the acceleration of green transport and power generation trends
  5. demand-pull inflation from fiscal stimulus