Morgan Stanley seems to think so
The reflation/inflation theme is going to be a key topic for the market this year but the big question remains, is it really coming back? Well, at least Morgan Stanley says it is.
The firm argues that US core PCE inflation will overshoot 2% this cycle, highlighting that the divergence in their view from the consensus being the assumption surrounding strength of private sector risk appetite.
"Our views on inflation, as on growth, are more bullish than the consensus. Since 3 April 2020, we have argued that a V-shaped recovery in growth would unfold and in May 2020, we warned that inflation will make a return this cycle. Since then, our conviction has only increased. Our GDP growth forecast of 5.9% y/y for the US in 2021 is significantly above consensus estimates at 3.9% y/y. We see US core PCE inflation ending the year at 2% y/y and staying above 2% on a sustained basis from 2022. In contrast, the consensus sees it reaching 2% over a longer timeframe and is skeptical that inflation will exceed 2% for a sustained period."
There's going to be a lot of debate on this matter but if there's one side of the camp that has been wrong more often than not in recent years, it is the inflationistas.
Considering the weak pressures seen last year, there is a distinct likelihood of a return in inflation this year. But then again, one can argue that whatever the case is, the jump is likely inconsequential and insignificant with input cost set to remain subdued for a prolonged period of time - not to mention zero/negative yields in most places.
Either way, just be wary of the developments - especially moving into 2H 2021 - in case the data starts to reflect a rise in annual inflation. That may cause the market to be a little jumpy but I want to say that the Fed will surely brush that aside for the most part.
If such pressures can be sustained in some way or another well into 2022, then perhaps one can argue that it is time to relook at the whole ordeal and how the market may have underestimated the recovery from the crisis.
Otherwise, I still would not expect the above to change the Fed outlook/stance this year.
