Equity markets had a jolly good day yesterday, the S&P 500 climbing back to the record high reached in early December and the FTSE 100 breaking free of its recent trading range. The World Bank confirming imminent growth added to the overall positive sentiment. Rio overnight announcing better than expected production numbers, and for the first time in 3 years Citi turning positive on the mining sector, helping the FTSE 100 at least start today on a solid footing. The rotation from equities according to UBS continues. December was the third straight month of ETF flows out of bonds and into equities.
Today we had US inflation data in the form of the Consumer Price index; unlike the recent surveys from UK, Europe and China where inflation may come in below analyst expectations, US inflation came in line with analyst estimates. After the report, the debate on CNBC turned rapidly to why, despite an increase in the Fed balance sheet, is inflation so subdued. Christine Lagarde, in an interview in the Financial Times also commented on the lack of inflation in the global economy, and warned of the perils of deflation.
The answer, I believe, lies in the earnings data. US average weekly earnings over the past 2 years has grown approximately 1.7% per annum, this is directly in line with US inflation. To see inflation picking up you must see wage inflation in my view. In the UK it is similar story, wage inflation is behind headline inflation; until average earnings increase and people have a greater disposable income headline inflation should remain subdued.