- April CPI higher than expected

- 10-year bond yields fall

- Market senses slowing growth as inflation bites

Hopes that inflation might be peaking were dashed this week after US CPI (consumer price inflation) for April came in above market expectations.

Nevertheless, US 10-year bond yields dropped by 0.3% to 2.8%, a sign that investors are starting to worry about slowing economic growth. (bond prices go up as yields fall)

Until recently rising bond yields (falling prices) had consistently led shares lower as the two asset classes moved in lockstep. Periods of falling share prices and bond prices are relatively rare.

10-year bond yields have doubled in 2022 as the Federal Reserve increased interest rates to bring down inflation.

With bonds providing their traditional haven quality in the face of higher than expected inflation this week, the market could be signaling that inflation is crimping consumer spending.

Consumer expenditure represents around two-thirds of economic activity.

CORE CPI REMAINS ELEVATED

The CPI measures a broad basket of goods and services and on an annual basis it remained close to 40-year highs in April at 8.3%.

The month-on-month rate fell for the first time since August 2021 to 0.3%, down from 1.2% in April. But It was the core inflation rate that spooked investors.

The core rate excludes more volatile items like food and energy prices, and it rose 0.6% month-on-month, more than expected and double March’s 0.3% increase.

Air fares have risen by 40% over the last three months. The Federal Reserve is concerned that inflation expectations become entrenched which will make it harder to squeeze out of the system.

But the rally in 10-year bond prices this week suggests the market senses that high inflation is already reducing demand in the economy.

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Issue Date: 13 May 2022