Inflation is not likely to return to, and stay at, 2.5%
The decline in US inflation since last June has given equity markets a shot in the arm over the past few months. Inflation expectations as derived from inflation-indexed bonds point to consumer price-growth of around 2.5% starting in June, and then a stabilisation at pretty much that level for years. This outlook is akin to a return to the market conditions we saw in the 2010s, when real yields were largely supportive of financial-asset and property prices and made it easy for passive investors to book gains. We don’t believe in this scenario of lastingly low inflation. On the contrary, we think high inflation will be with us for a while.
There’s mounting evidence that developed-world economies are entering an extended inflationary phase of the business cycle – a phase in which supply will struggle to keep up with demand. We’re in for a rapid succession of inflationary growth spurts driven by structural factors, followed by disinflationary slowdowns orchestrated by central banks. This will bring renewed cyclicality to the economy, which is bad news for passive investors. It also means we need to take a fresh look at investment themes that had fallen by the wayside when the business cycle disappeared. Read more>