‼️⚠️Nordea's U.S. Inflation Preview

• There are mainly two components to watch in the core inflation report due 10th of June. First, the price on used cars and second the rent of shelter component, while also transportation services were part of flipping the April core inflation report in an upwards direction.

• Prices on used vehicles increased by an astonishing 21 % YoY in April (contributing 0.8% to the yearly change in core inflation). According to Manheim Consulting, prices on used cars and trucks are expected to climb further to 50 pct YoY in May or June (3 months lag). If we assume a 50% yearly increase in used cars in May (Manheim may exaggerate the yearly price increase a bit), then core inflation will potentially surpass 4%.

• If we assume a 50% YoY increase in the used cars component, and hold everything but the rent of shelter component constant, we can showcase the outcome space for the core inflation print in May given various yearly price increases in shelter.

• If the rent of shelter component reaches 2.5% (we find that likely over the coming months) and the used car component prints at 50% YoY, then you already have a cocktail that could bring core inflation above 4%. This is CLEARLY above the early consensus at 3.4%. This is risk scenario for May, but seems feasible at the latest in the June report

• Our trend-model suggests that we can reach 7- 8% headline inflation this summer but whether it is enough to scare anyone, including the Fed, remains to be seen.

• The market is still mostly stuck in a transitory inflation narrative. A 1yr zero-coupon inflation swap prints around 3.45%, which hints of an elevated inflationary summer before a retracement into the autumn again. Long-term zero coupon swaps price around 2.5%, which is fairly in line with the Fed AIT-regime targeting 2% PCE price increases on average, which should take CPI on average to 2.35% or thereabout.

• So the market has bought the AIT-regime shift and its credibility, but over the next year or two the market is likely still (severely) underestimating US inflation risks.

Full Article: https://corporate.nordea.com/article/65915/usd-inflation-preview-prepare-for-another-shocker