Signs of inflation are roiling asset markets

Over and over again, Federal Reserve officials have advised that any pickup in inflation this year was bound to be transitory. Traders in financial markets, however, aren’t so sure.

Even before the faster-than-forecast rise in U.S. consumer prices reported Wednesday, investors had become fixated on widespread signs of cost pressures as commodities like copper and lumber surged to records and the bond market’s expectation for inflation over the next decade climbed to an eight-year high. The focus is shaking up the stock market, sending the Cboe Volatility Index to the highest since March.

The most recent round of U.S. corporate earnings calls showed the word inflation was back in vogue, with its usage rising 800% from a year ago, according to Bank of America Corp. Even last week’s payrolls report, which showed the U.S. added only about a quarter of the jobs economists expected in April, is being viewed as a sign that companies will have to boost wages to entice more unemployed workers into the labor force.

“Inflation risk is what we want to watch here,” Savita Subramanian, Bank of America’s head of U.S. equity and quantitative strategy, said Friday. “I don’t know if it’s going to be transitory.”

[Read more: Soaring inflation could boost 2022 Social Security COLA]

The U.S. consumer price index for April boosted the bond market’s five-year inflation outlook Wednesday to the highest since 2005. Month-over-month CPI came in at 0.8%, beating economists’ estimates of 0.2%. On a year-over-year basis, CPI rose 4.2%, above estimates of 3.6%. The figures pushed the 10-year Treasury yield up five basis points to 1.67%.

The growing inflation fears are a political threat to President Joe Biden’s plans for vast new spending, particularly after a disappointing jobs report on Friday.

But policy makers are standing their ground. Even known Fed hawks have chimed in over recent weeks to say that inflation is unlikely to get out of control despite unprecedented government spending in response to the coronavirus pandemic. Both Fed Chairman Jerome Powell and a top Biden administration economic adviser have said that the inflation now apparent in certain pockets of the economy is “transitory.”

That description raises an important question: Just how long does “transitory” mean? The answer is probably unknowable at the moment.