Why Are Bond Yields Declining As Inflation Surges?

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On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed the May U.S. inflation numbers and the puzzling reaction in bond markets. They also explored how the Group of Seven (G-7)’s proposal to establish a global minimum corporate tax rate could impact markets.

U.S. inflation speeds up again, May CPI report shows

U.S. core inflation accelerated by 3.8% on a year-over-year basis during May, Eitelman said, per the Bureau of Labor Statistics’ consumer price index (CPI). Characterizing the increase as a bit uncomfortable, he noted that May’s reading marked the second straight month that core inflation exceeded economists’ expectations. However, similar to April’s spike, Eitelman said that last month’s surge in consumer prices can also largely be attributed to supply-chain bottlenecks and the aggressive reopening of the U.S. economy as restrictions fade.

Two of the sectors with the highest price increases during May were the automobile industry and the airline industry, he explained. The surge in car prices is being driven by the well-publicized global shortage in semiconductor chips, Eitelman said—a problem which he expects will resolve over time. “There’s a natural incentive for these companies to invest in expanding their production capabilities in order to take advantage of the higher prices and ultimately profit from them,” he noted.

The increase in airfare, on the other hand, is largely a result of the pick-up in U.S. air travel this spring, especially when compared to last spring’s very low numbers, Eitelman said. “At this time last year, with the country in lockdown, the demand for air travel had collapsed—in other words, the industry had no pricing power whatsoever. Now, with demand recovering, airlines are able to charge more normal prices,” he explained. Amid this backdrop, Eitelman expects the rapid rise in airfare to be more of a temporary factor—one which he sees as very unlikely to persist year-in and year-out.

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