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For Professional Clients and, in Switzerland, for Qualified Investors only. In Israel for Sophisticated Investors only.
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© 2020. BNY Mellon Investment Management EMEA Limited. All rights reserved.
IDEAS AND KNOWLEDGE TO INSPIRE YOUR INVESTMENTS THINKING
7 May 2020

Could inflation be closer than we think?

In the short-term, markets have understandably focused on the immediate impact of efforts to contain COVID-19 on economic growth. The global economy has experienced a ‘sudden stop’, and it is possible that the resulting recession will be deeper than that experienced during the global financial crisis. The excess capacity that has been created, including soaring unemployment, has led to concerns that, if anything, inflation will be too low, failing to meet central bank targets. This has allowed the deployment of easier monetary policy and quantitative easing programmes of vast scale.

 

Of comfort to both markets and central bankers will be the persistent lack of inflation that has existed for over a decade. With this trend now deeply embedded in market psychology, it is easy to extrapolate these conditions into the future. The pricing of many government bond markets reflects this, pricing in the expectation that central banks will fail to meet their inflation targets for decades into the future. In the longer-term, however, the political repercussions of today’s events may sow the seeds for a reversal of several trends that have underpinned this period of abnormally low inflation.

 

As just one example, even before the current crisis, a reassessment of globalisation was underway, with the US administration using tariffs as a tool to incentivise corporations to prioritise domestic production. In light of recent events, and the rapid breakdown of global supply chains that has occurred, corporations are likely to question their own production models. The lower costs and efficiency of globalised, just-in-time supply chains have been shown to be highly vulnerable to shocks. As supply chains shorten, the higher labour costs involved in domestic production, combined with a need to maintain higher inventories and an allocation of resources where lowest production cost is no longer the primary driving factor are all likely to be inflationary.

 

David Hooker, portfolio manager. Insight Investment.

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Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.

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