The recent inflation spike, which pushed debt yields higher and equity prices lower, is temporary, according to a research report from Oxford Economics.
"Inflation is picking up across advanced economies (AEs) and emerging markets (EMs), but the data suggests this will again prove temporary," the report read. "We see no signs of lasting pressures that might turn a temporary spike into a lasting overshoot."
The data the report is referring to is the "slack" in the labor market, which keeps wage pressures tamed in the face of fiscal easing. The report noted:
"Fiscal policy support for the household sector strongly produced a peculiar jump in disposable income at a time of falling GDP. However, the weak labor market is likely to prevent any wage-price spiral necessary to generate persistently excessive inflation."
The U.S. unemployment rate is standing at 6.3%, well above its natural rate of 4%, a threshold that could set the economy into cost-push, demand-pull inflationary pressures.
Meanwhile, capacity utilization is standing at 74%, well below the full capacity level of 85%, which could trigger cost-push inflation at the wholesale level.
Oxford Economics is on the same page with Federal Reserve Chairman Jerome Powell, who also sees inflation and unemployment below its targets.
"The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved," Powell said in prepared remarks for the Senate Banking Committee.
The Fed's goals include a low unemployment rate, close to the natural rate, and an inflation rate at 2%. However, Fed officials have said they are willing to accept higher inflation until the economy fully recovers.
Apparently, the Federal Reserve wants to avoid the Bank of Japan's mistakes. The world's third-largest economy is working to get out of a deflationary trap, counting more than two lost decades of economic growth.
But there is one more factor that supports the case for tamed inflation. The rapid digitalization of the economy under the pandemic, which has made business more efficient, and in a better position to absorb any wage hikes.
The bottom line: Inflation doesn't appear to be a long-term problem at this time, though equity traders may use the recent spike in interest rates as a cause to take a close look at valuations.
Read more here:
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