The Economist February 20th 2021 Finance & economics 63In October South Africa and India there-
fore proposed to suspend tripsrules relat-
ing to copyright, industrial designs, pat-
ents and trade secrets, until most of the
world’s population is immune. James Love
of Knowledge Ecology International, a
think-tank, says the waiver could help
overcome the often intense pressure from
rich-country governments on poorer ones
not to use flexibilities written into the
rules. Patent holders, of course, claim such
waivers hurt their incentive to invest.
(Whereas under a compulsory licence
buyers would have to pay some royalty, un-
der the proposed waiver they would not.)
The truth is that the waiver itself might
not do much to expand vaccine produc-
tion. Without companies facilitating the
transfer of technology it would have
“roughly zero net effect”, says Rachel Sil-
verman of the Centre for Global Develop-
ment, another think-tank. And today’s
supply constraints reflect manufacturing
bottlenecks rather than patent protection.
As for other products, Bryan Mercurio of
the Chinese University of Hong Kong says
that if governments have not issued com-
pulsory licences, often the problem is notwith the existing trade rules but with their
own domestic lawmaking.
In any case, the proposal has not gained
much support among other wtomembers
and Ms Okonjo-Iweala does not seem to be
advocating for it. On February 15th she
pointed to existing tripsflexibilities, and
warned about the risks of putting off in-
vestment in vaccines to combat the varia-
nts of covid-19. Ms Okonjo-Iweala wants to
set up a longer-term framework for re-
sponding to pandemics instead. The ques-
tion is whether it can look different to the
one already in place. I
f you hadto pick an emblem of the
wild ride that financial markets have
been on, it would be Carnival. When the
pandemic took hold, its cruise ships
were regarded as floating petri-dishes.
Yet last April it was able to raise capital,
as the corporate-bond market thawed.
More recently it raised $3.5bn at half the
interest rate that it paid last year. Now all
the talk is of pent-up consumer demand
and the inflation that will unleash. Car-
nival’s bookings for the first half of 2022
are above their level in 2019. The compa-
ny has captured the market zeitgeist
once again.
If you can marvel at the speed of the
firm’s change of fortune, marvel too at
another turnaround. The yield gap be-
tween ten-year Treasury inflation-pro-
tected bonds (tips) and conventional
bonds of the same maturity is widely
seen as a measure of long-term inflation
expectations. These inflation “break-
evens” have soared to 2.2% from a low of
just 0.5% last March.
Serious people are talking of a return
to 1970s-style inflation. In America bum-
per fiscal-stimulus packages seem to
arrive like overdue buses, one after an-
other. They are layered on top of unprec-
edented monetary easing and a pledge by
the Federal Reserve to tolerate inflation
above 2% for a while. The case for higher
inflation seems more persuasive than it
has for years. But break-evens will not
tell you a lot about whether it might be
sustained. They are too volatile to be a
reliable guide.
A jump in annual inflation seems
assured. Last spring, when cruise liners
were beached, there was a glut of crude
oil in storage and in seaborne tankers.
The month-ahead price of oil briefly
turned negative. A year on, inventories
are falling. The price of a barrel of Brentcrude has surged past $60. The trend is
mirrored in the rising prices of other
commodities. That will push up year-on-
year comparisons of prices and thus an-
nual inflation. Commodity markets offer a
template of what could yet happen in the
wider economy: a surge in demand meets
constrained supply, leading to inflation.
In the central-banking model, expecta-
tions are self-fulfilling: businesses set
prices and wages in accordance with the
inflation they look ahead to. Yet it would
be unwise to put too much faith in break-
evens. They often reflect market influen-
ces that are only tangential to future in-
flation. Look at Britain, for instance. Legis-
lation in 2004 obliged pension funds to
match their assets to their long-term
promises. This in turn spurred demand for
long-dated index-linked bonds, and the
debt-management office issued lots more
of them. Despite this issuance, the de-
mand for inflation protection has over
time driven real yields down to unusually
low levels and pushed up break-evens.
In America, the oil price appears to
have an outsize influence on break-evens.A simple model based on the oil price
and the dollar tracks market measures of
expected inflation quite closely, accord-
ing to a recent note by Steven Englander
of Standard Chartered, a bank. His mod-
el, based on data from 2006 to 2016,
predicts the recent rise in break-evens
pretty well. Sharp rises in the oil price
tend to push up inflation, but the effect
is temporary. They ought not to influence
medium-term break-evens, but in prac-
tice they do.
Bonds respond to changes in risk
appetite in ways that have implications
for implied break-evens too, says Eric
Lonergan of m&g, a fund manager. The
ten-year Treasury is the quintessential
safe asset. It is liquid (unlike tips) and
investors use it as protection against
extreme moves in share prices. When the
stockmarket falls hard, as it did last
March, the price of a ten-year Treasury
typically rallies, and the yield collapses,
as investors seek safety. But as risk appe-
tite returns, the effect unwinds. The yield
curve has steepened—which is to say,
yields on longer-dated bonds have risen
relative to those on shorter-dated
bonds—as it tends to at the start of an
economic recovery. A corollary is that
break-evens have also risen. But this is
mostly the outcome of shifting attitudes
to risk, rather than forecasts of inflation.
For all their shortcomings, inflation
break-evens are closely watched. The
whole edifice of asset prices, from shares
to homes, rests on rock-bottom interest
rates, and thus on quiescent inflation.
Before the pandemic, financial markets
were prone to periodic growth scares
(trade wars, an over-zealous Fed, and so
on) that spooked stockmarkets. Now we
seem to be set for a series of inflation
scares. And Carnival’s cruise liners are
not even at sea yet.ButtonwoodJumping ship
What market-based measures do and don’t tell you about inflation fearsBreaking bad
United States, ten-year break-even inflation rate, %Source: Refinitiv Datastream3.02.52.01.51.00.50
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