Atlanta Fed Business Inflation Expectations Ticks Higher

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Atlanta Fed Business Inflation Expectations

  • YOY Business Inflation Expectations increased to 2.0% from 1.9% in October

Takeaway

Around 10 AM yesterday, the Dollar Index rallied and bonds sold off (a typically “hawkish” reaction). The reason was a slight uptick in the little-followed Atlanta Fed Business Inflation Expectations Survey.

What made the report “hawkish” wasn’t the fact that expectations for year-over-year inflation rose to 2.0% (they were at 2.1% earlier this year). Instead it was that the percent of business executives who saw inflation as starting to trend higher over the next 12 months jumped from 54% in May (the last time the questions was asked) to 63% in November, which is a multi-year high.

Declining inflation expectations as measured by the bond market have been a big topic of discussion and are partially responsible for the “dis-inflation” talk here in the U.S. But actual expectations by business owners for inflation pressures over the coming 12 months are trending materially higher—not lower.

Combine that with the uptick in the Fed’s quarterly wage inflation data, and there are growing signs that wage inflation has bottomed and is finally trending upward. (This is anecdotally confirmed by the U-6 underemployment index dropping to multi year lows at 11.5% in last week’s jobs report.)

Bottom line, I’m pointing this out because there are very few people prepared for inflation. From a portfolio standpoint, while it isn’t something we need to position for today, it is something we need to watch for. That’s because there are signs emerging that inflation has bottomed, and is starting to (slowly) gain some upward momentum, led by wage gains.

This is something we will continue to watch over the coming months/quarter, because if we do see inflation, that’s a major trend change few people are properly positioned for at this time.

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