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What can we expect from inflation?

09082021_Inflation

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.

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Interesting articles, however I disagree. Inflation isn’t always caused by wage increases. For example, inflation can be caused by currency devaluation (e.g. Asian Financial Crisis), excessive money printing / fiscal spending (e.g Venuswala and Zimbabwe) or energy cost inflation (e.g. Oil Shock).

    We are seeing all three of these factors at once. Currencies are being devalued by QE – however the effect is mostly invisible because every country is doing QE. Every government spending big on Covid support. And the transition to green energy will got every country and significantly increase costs.

    Once inflation gets going, it can change inflation expectations and become a self fulfilling prophecy.

    Secondly, you are correct that there are much lower levels of unionised labour than decades past. However, I would argue that historically it was inflation that created a need for unionisation. And that the weakening of unions over recent decades is strongly linked to lower inflation levels.

  2. Hi Rodger
    I would agree, realising this is a financial thing
    As in life everything is transitory.
    The damage it does in between Is sometimes incalculable
    we saw with another transitory event which was WW2.
    And numerous other events.
    I realise your job is too look for opportunities in the noise
    Just wanted to put some context around the inflation thing.
    Ben

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