Investment Perspectives
Inflation - momentary or momentous?
16 Jun 2021
Global inflation is rising as economies re-open following the most severe economic shock since the great depression. Most forecasters suggest the surge in inflation pressures will prove transient, dissipating towards the end of 2021. Markets do not expect a sustained rise in inflation either – market expectations are for inflation to remain above target, but do not suggest current pressures will persist. However, the balance of risks around the inflationary outlook have shifted to the upside. Inflation running persistently hot may not be disastrous for economies but may still have implications for interest rates, yields and valuations, relative to current levels. A more profound shift to a high inflation environment is potentially more disruptive for both the global economy and markets.
Outlook
Inflation was always expected to rise in 2021 as economies emerged from lockdowns, but recent inflation prints have surpassed expectations as global supply and labour shortages exacerbate base effects.Structural forces, particularly demographics, will continue to weigh on inflation over the longer-term but unprecedented monetary and fiscal policy, a slowdown in globalisation, and more patient central banks pose upside risks of a shift towards a higher inflation environment. Consensus expectations are for more severe inflationary pressures to ease as we enter 2022 and for inflation to return to levels not dissimilar to those of the past few decades. However, there has been a clear shift from the tail risk being one of deflation to one of high inflation, a scenario that could have profound consequences for the global economy and markets.
Read our article where we consider the risk of a momentary surge in inflation becoming a momentous shift to a prolonged period of high inflation.
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