Part 5 : is faster inflation for 2020 being under-estimated?
Markets appear to be under-estimating the risk of US inflation gathering significant pace.
Although currently still low, for the past six months, the Fed’s preferred inflation measure has been progressing at a rate slightly exceeding 1.5%. Inflation has been pulled down by several specific factors such as health insurance costs, but even the more refined inflation measures are showing price rises to be moderate and below their 2005–07 levels. Inflation expectations are also low, sitting at less than 2% for the next eight years.
Although it is difficult to see inflation breaking higher, history has shown that the economy can follow non linear patterns. During the extended period of low unemployment in the sixties, inflation only started to rise in 1966. The fall in unemployment to below 4% prompted a sharp acceleration in inflation, which shot up from approximately 1% to almost 5% in the space of three years.
How will the central banks and bond markets react if inflation starts to accelerate? If recent central bank statements are anything to go by, the initial reaction may be not to take any action. How bond markets would react to a delayed response from the Fed is unclear, but the current term premium  provided by 10-year bonds is offering little in the way of protection from a sharp readjustment in short-end interest rates.
 Term premium: the additional amount that investors receive for duration risk, which in turn is linked to the average life of the bond.
See also :
The opinion expressed above is dated January 2020 and is liable to change. Latest available data is used.
This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS. LAZARD FRERES GESTION – a simplified joint stock company with share capital of €14,487,500 – Paris Trade and Companies Registry No. 352 213 599. 25, RUE DE COURCELLES – 75008 PARIS, FRANCE