Everything in markets seems to revolve around inflation, inflation expectations, and rising bond yields. This makes it the perfect time to revisit our outlook on inflation.

Inflation is a critical topic because the Fed has become sensitive to prices again, as indicated in both the meeting minutes and the December economic projections. The Fed is now claiming a small victory on employment instead.

Risk assets generally perform well in reflationary environments, provided higher inflation does not lead to higher policy rates. However, when central banks are concerned about inflation, even small increases can have significant implications for equities, crypto, and other risk assets. These markets now fear that the Fed might end the reflationary party prematurely.

So, where do we stand on inflation today? Market-based measures like inflation fixings and swaps are rising, but are we seeing actual inflationary pressures? We will release a comprehensive chart deck soon, detailing global inflation trends. One of the most critical trends to watch is China.

Chinese weakness has been a significant factor preventing higher inflation calls. It’s nearly impossible to experience concerning inflation levels in the US without momentum in Chinese prices. Chinese PPI is a reliable leading indicator for US inflation, making China a potential final piece in the inflation puzzle.

Chart 1: China vs. US PPI