Highest Inflation Figures in the United States Since 1990

‍Chart of the Week

The chart shows the yield curve over a five-year period. One month ago (blue line), you had to pay 1.9% for a 5-year loan; now it is 1.5% (red line). However, interest rates for a one-year loan have increased from 0.4% to 0.6%. In technical terms, this means the yield curve has flattened.

‍Why This Matters:

A flattening yield curve is typically a sign of an approaching recession. At present, it suggests that slower growth is expected. The momentum following the Covid recovery is likely to weaken. At first glance, the increase does not appear dramatic. Even 0.6% for a one-year loan is still relatively low, but it is nevertheless 50% higher than just one month ago. Startups in the technology sector in particular, which often report significant losses and have yet to generate profits, frequently rely on short-term debt financing. Homeowners with a LIBOR mortgage must now also pay 50% more in interest.

Highest Inflation Figures in the United States Since 1990

This week, the U.S. inflation figures for October were published. They showed an increase of 6.2% compared to the previous year — the highest level since 1990. As a result, interest rates rose immediately.

The rise in interest rates is not significant by historical standards, but it could signal a turning point. At present, none of the major central banks are indicating lower interest rates. Most are suggesting rates will remain at current low levels for another one to two years or increase slightly. Investors who allocate capital to bonds should therefore be concerned.

Some of the major banks reacted immediately and adjusted their economic growth forecasts and interest rate projections accordingly:

The chart on the left shows how Goldman Sachs lowered its earnings forecasts for equities over the next two years (from dark blue to light blue). The chart on the right shows how Goldman Sachs, in turn, raised its interest rate forecasts (from light blue to dark blue). Lower corporate earnings generally also mean lower stock prices. However, the stock market has not yet priced in these concerns. This is because many investors still believe central banks’ assurances that the high inflation is only temporary and will soon decline.

Inflation Forecasts

The chart shows the inflation expectations of most market participants and the sectors from which inflation originated and is expected to come. Core inflation reflects the price increase of all major goods excluding the highly volatile energy and food prices. Core inflation is currently below 4% and is not the primary concern. The currently high inflation figures are mainly driven by elevated energy prices (particularly oil) and rising food prices. Oil prices increased by 260% from their low in April 2020 to March 2021. Since inflation compares today’s prices with those of one year ago, this price surge is now fully reflected in the data. Even if the oil price were to rise from the current USD 80 to USD 120, that would “only” represent a 50% increase. A price of USD 120 has only been reached twice before — in 1864 during the Pennsylvania oil boom and in 2008 due to high global demand. Therefore, the assumption that the impact of energy prices on inflation will decline over the coming months is plausible.

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