Don't downsize your dreams
Inflation: beyond transitory
Summary
Inflation has made a forceful comeback recently, and we believe it will last longer than the financial markets and many investors currently anticipate. In part one of a two-part paper, we look at the factors that may cause a more persistent rise in consumer price inflation – and why it matters to investors.
Key takeaways:
- The recent inflation spike has been amplified by several extraordinary and temporary factors – including the post-Covid rebound and base effects
- But there are other reasons why consumer price inflation may turn out to be “sticky” – including continued accommodation from central banks, less globalisation and an aging population
- We also expect the fight against climate change and economic inequality to contribute to upward inflationary pressure
1 Source: OECD as at August 2021. OECD is the Organisation for Economic Co-operation and Development.
2 When consumers, corporations and other parties expect inflation to remain steady, their “anchored” inflation expectations help central banks maintain price stability. If inflation expectations are de-anchored to the downside, the markets think inflation will be lower than the central banks’ target level.
3 In the US, the multi-year growth in broad money supply now exceeds the multi-year growth in real GDP by a wide margin. Historically, this measure of excess liquidity has also coincided with a rise in consumer-price inflation.
4 They do this by pegging interest rates at artificially low levels to reduce the costs of servicing sovereign and private debt.
5 This also has the added political aim of helping countries ensure the domestic supply of critical products, which increases their strategic self-sufficiency.
6 For a deeper discussion of the demographic impact on inflation see, for example, Goodhart, C., Pradhan, M. (2020): “The Great Demographic Reversal” and Juselius, M. and Takáts, E. (2018): “The enduring link between demography and inflation”
7 The precise mechanism linking high inequality and low inflation remains unclear, but one driver is that lower-income households tend to consume more. Higher consumer spending tends to push up inflation, all else equal.
8 Other factors pushing up gas prices include supply-side constraints and a generally higher demand for energy.
Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice. No offer or solicitation to buy or sell securities and no investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice. However, if you choose not to seek professional advice, you should consider the suitability of the product for yourself. Investment involves risks including the possible loss of principal amount invested and risks associated with investment in emerging and less developed markets. Past performance of the fund manager(s), or any prediction, projection or forecast, is not indicative of future performance. This publication has not been reviewed by the Monetary Authority of Singapore (MAS).
Issuer: Singapore – Allianz Global Investors Singapore Ltd., [Company Registration No. 199907169Z].
Active is: Anticipating what’s ahead
2022 outlook
Summary
Be proactive and prepare for volatility in 2022 – and align with the long-term trends that could offer opportunities for investors.