Inflation rates have soared around the world and forecasts have moved sharply higher in recent months. There are three reasons that this outlook remains concerning: continued problems in global supply chains stemming from the pandemic, the fact that the commodity upswing has been exacerbated by the invasion of Ukraine and also that pricing power appears to have returned to labour markets.
Although the pivot to a more hawkish tone on inflation at some of the major central banks is welcome, their more aggressive stance must be seen from a starting position of extreme dovishness, with some time before a neutral policy rate is achieved even in the US. Other major central banks are even further behind. When we look back in history at periods of high inflation, there are worrying similarities to today’s backdrop.
Monetary and fiscal policy remain at highly stimulative levels even with inflation at multi-decade highs. Years of worrying about inflation undershoots have become embedded, making it difficult to contemplate that some historical economic relationships may be reasserting themselves.
We don’t believe that the world is about to see a rerun of the 1970s, but we do believe there are risks that inflation may prove persistent for longer than expected. This belief is reinforced when we examine central banks’ own attempts to measure the ‘stickiness’ of inflation. For example, core sticky inflation, as measured by the Federal Reserve Bank of Atlanta, is at levels not seen since the 1990s, suggesting that inflation may not easily return to pre-pandemic levels.
David Hooker, senior portfolio manager, Insight Investment.
Doc ID: 1009587
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