Inflation worries increase in China, USA

China announced yesterday that inflation had soared again last month, reaching 8.7%, versus the government target of 4.8%. Part of the increase is clearly due to the effects of recent major storms. But with the US Fed likely to cut rates soon, China remains in a difficult position. If it increases interest rates, then the currency will rise further, making it a target for ‘hot money’. If it doesn’t, then inflation (particularly in food and energy) will continue to rise.
Meanwhile, Bloomberg has analysed developments in US fixed income markets and suggests that bond traders now believe that the US Fed is about to ‘lose control of inflation’. Since 29 February, the yields on US Treasury Inflation-Protected Securities (TIPS) have been negative. Buyers are apparently prepared to give up ‘real yield today’ for the security of inflation-proofing in the future.
Against this background, it is perhaps not surprising that traders pushed up crude prices yesterday to a new record of $107.91/bbl, as they continued to search for a ‘store of value’. US natural gas prices have also strengthened recently, and are now over $10/MBTU.

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