The fortunes of U.S. and euro area inflation expectations are changing and changing fast. I recently wrote about the need for taking a more defensive stance in structuring investors' portfolios when it comes to dealing with potential inflation risk (see the post linked here), and I also noted the continued build up in inflationary momentum in the case of euro area (see the post linked here).
Of course, the current momentum comes off the weak levels of inflation, so the monetary policy remains largely cautious for the U.S. Fed and accommodative for the ECB:
In fact, last week, the Fed's consumer survey showed U.S. consumers expecting 2.7% inflation compared to 3% in last month's survey, for both one-year-ahead and three-years-ahead expectations. But to complicate the matters:
- Euro area counterpart survey, released at the end of March, showed european households' inflationary expectations surging to a four-year high and actual inflation exceeding the ECB's 2 percent target for the first time (February reading came in at 2.1 percent, although the number was primarily driven by a jump in energy prices), and
- In the U.S. survey, median inflation uncertainty (a reflection of the uncertainty regarding future inflation outcomes) declined at the one-year but increased at the three-year ahead horizon.
Which, in simple terms, means three things:
- From 'academic' point of view, we are in the world of uncertainty when it comes to inflationary pressures, not in the world of risk, which suggests that 'business as usual' for investors in terms of expecting moderate inflation and monetary accommodation to continue should be avoided;
- From immediate investor perspective: don't panic, yet; and
- From more passive investor point of view: be prepared not to panic when everyone else starts panicking at last.