Traders are pricing in annual U.S. consumer price gains of 7% or higher for the next four months

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Traders have ratcheted up their forecasts for U.S. consumer price inflation over the next few months, and now see annual headline figures coming in at 7% or higher into early next year.

So-called “fixings,” which trade as derivatives on the likelihood of where future consumer price index levels will land, are at levels that imply headline year-over-year CPI prints of 7% in November and 7.3% each month from December through February, said Tim Magnusson, partner and senior portfolio manager at Garda Capital Partners LP in Minneapolis. Those would be the highest levels in almost 40 years.

With inflation already running at an almost 31-year high, many have been searching for any signs that price pressures may be easing. With oil prices slumping near six-week lows on Thursday and an easing backlog of container ships at Southern California ports, Wells Fargo Investment Institute’s Scott Wren is one of the analysts saying inflation is in the process of peaking. Meanwhile, Federal Reserve policy maker, John Williams, is defending the central bank’s relaxed approach to inflation.

“The bottom line is inflation has gotten worse since the Fed’s last meeting, and it is very unlikely to go down,” Magnusson said in an e-mail to MarketWatch. “Imagine this:  The FOMC meets on January 26th with CPI having printed 7.3% for 2021.  How will they continue to keep policy unchanged?”

The fixings readings worry some traders because they have demonstrated their predictive power. In October, fixings were at levels that implied the headline year-over-year CPI print would come in at 5.9% in October, and 6.4% in both November and December. October’s headline annual rate came in at 6.2%

Rob Daly, director of fixed-income at Glenmede Investment Management in Philadelphia, says he thinks inflation has yet to peak in the U.S. He says the CPI is a lagging indicator that won’t reflect any current easing of supply bottlenecks until the end of the first quarter next year, at the earliest. Meanwhile, he says he’s continued to be long on inflation breakevens as an investment, calling them a “good allocation, given inflation uncertainty.”

“A lot of us in the market have never even seen this, including myself. Everybody is trying to figure out what this means if it stays higher,” Daly said in a phone interview. “Everytime it goes higher, fear increases, but inflation could turn out to be short-lived at higher levels than before.”

On Thursday, U.S. stocks traded mostly higher on choppy trade, though the Dow Jones Industrial Average was weighed down. Most Treasury yields, including the 10-year rate were also lower as investors continued to evaluate the impact that inflation and potentially tighter Federal Reserve policy may have on the economy.

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