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Second wave

In a few hours, the EU will publish the CPI for the month of October, with an expected increase of 2.6% and the U.S. will publish the PCE index with an expected increase of 2.1%. Both are reasonable figures and close to their respective central banks targets. At the same time, gold is making new all time highs. In fact, gold is having the best year within the last 30 years. One possible explanation is that inflation is still not fully reflecting the consequences of excessive government spending, because it’s designed to smooth the impact of price spikes. In the chart below, you can see the 2 year inflation breakeven. It shows market expectations for inflation in 2 years, derived from TIPS. You can see that it predicted the inflation increase in 2021 and also the decrease due to Fed aggressive hawkish policy. It is now showing a change in trend to the upside, which is being reflected on Treasury bonds yields, and it’s probably the reason why gold is breaking new highs. We may be assisting to the early stages of the second wave of inflation.


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