What can we expect from inflation?
It has been noted by some economic observers that Fed Chairman Jerome Powell has, in 2021, been consistent in one aspect of his predictions about inflation; that he’s consistently wrong. The message, as we’ve discussed here at the blog throughout the year, is that inflation is transitory. Base effects will ensure inflation turns to disinflation with the passage of another year, and capitalism’s supply response will solve the bottlenecks in global commodity supply chains.
We’ve also held the inflation-is-transitory view for two major structural reasons related to wages.
The first is that without persistent wage increases, inflation itself cannot persist. The second is that much lower levels of unionised labour than decades past, and much higher investment in labour-displacing automation, will serve to keep a lid on any rising aggregate wage claims. Consequently, structural downward pressures on wages, will keep a lid on inflation.
The conclusion is bullish for equities, and the fall in US 10-year Treasury bond yields from near 1.80 per cent in February this year to nearer 1.15 per cent accords with our view. It seems the majority agree. A recent Bank of America survey of 240 Global Fund Managers revealed less than a quarter (22 per cent) believe inflation will accelerate in the next year. Almost three quarters believe Jerome Powell’s message – inflation will be transitory.
And, in the US, implied inflation appears to have settled down too. The difference or spread between the yield-to-maturity of US Treasuries and TIPS (Treasury Inflation-Protected Securities) have largely flattened out at between 2.2-2.4 per cent for ten years and between 2.3 and 2.6 per cent for five years, suggesting fears of serious inflation were short-lived.