EN - Business (Newsletter) - Flipbook - Page 8
LIONTRUST
INFLATION, DEFLATION OR STAGFLATION?
We continue to believe inflationary concerns will be temporary
rather than long lasting; while headline figures are elevated
at present, core levels remain fairly steady. On the former,
we are seeing a kind of rolling base effect move through the
system, with gas prices causing a spike one month and used
cars the next, but none of these are likely to calcify into higher
long-term core inflation. Headlines have focused on the US
consumer price index (CPI) as prices for petrol, used cars, rent,
food and other goods continued to climb.
As a counterpoint to concerns about inflation, it was interesting
to see an argument for deflation from innovation-focused
US fund manager Cathie Wood recently. She cited several
deflationary forces that could overcome the supply chaininduced inflation currently troubling the global economy, with
technologically enabled innovation the most potent. Wood
cites declining artificial intelligence (AI) training costs, for
example, with this technology
likely to impact every sector,
industry and company.
Some commentators have also
expressed concerns about potential
1970s-style stagflation, in which
persistent high inflation combines
with unemployment to create stagnant
demand in a country’s economy. To be in
stagflation, however, economies need to be stagnating
and there is little evidence of this. While the energy crisis
that sparked most of the inflation issues of the 70s looks
unlikely to reoccur, what we do have is a world with huge
debt-to-GDP ratios and many countries where low interest rates
have become requisite fuel for economic growth, and anything
to change that will create volatility around inflation.
INTEREST RATES AND TIGHTENING POLICY
Over recent months,
central banks have
started to talk about
potential interest rate
rises, although the
uncertainty created
by Omicron has
likely
delayed
this process. In
any case, any hikes are expected to
be gradual and we should remember
that even a 0.5% increase in UK base
rates, for example, would still mean
we are effectively on emergency
monetary policy.
All the worry around higher UK
rates also serves as a reminder
8
that, while this dominates newsflow, we are running diversified
portfolios for which the impact of hikes by the Bank of England
should be limited. As things stand, four hikes are already priced
into UK markets by the end of 2022, which feels excessive.
In the US, meanwhile, Federal Reserve chair Jay Powell was
recently re-elected for another term and safely ensconced for
another four years, which has paved the way for faster-thanexpected withdrawal of asset purchases
and rate rises, citing a strong economy and
inflationary pressures. Highlighting
how quickly the Fed has moved
in recent months, a survey by
the Financial Times suggests
the bond-buying programme
will be over by the end of
March with a rise in rates
to follow soon after.
