Bond Outlook by bridport & cie, April 13 2011

The argument that inflation is under control in the USA runs something like this:

• Commodity prices and a weak dollar are transitory phenomena
• They act as a tax on consumers
• They are not washing through to wage increases
• Food and energy costs are excluded from official data on core inflation
• Therefore there are no inflation worries

We do not find the argument convincing, but it is a reminder that markets have two sides, and that the Fed is promoting this very view. We have doubts about the sense of leaving energy and food out of the inflation measure, and suspect that the seeds for inflation have already been sown by dollar weakness, high input costs and the dollar printing press.

The IMF has entered the fray in criticising the USA for a totally inadequate approach to deficit cutting; the USA pledged, along with other members of the G20 except Japan, to halve its deficit by 2013. Even after the recent budget agreement, the country is nowhere near the path to meeting that target.