A Symphony Out of Tune

With inflation surprising to the upside and lasting longer than most expect, we believe investors will need to rethink portfolio management and what it means to own a balanced portfolio. Below we address many of the questions related to our view on inflation and its implications for the future.

Question: What is RBA’s view on what appears to be booming inflation and the potential for stagflation?

Prices have clearly surprised to the upside and have already lasted for longer than most expected. In fact, today’s supply disruptions have now surpassed the duration of the 1973/1974 oil embargo. The real question is how long will these inflationary pressures persist? Regarding stagflation, we see nothing in the data to suggest this problem. Stagflation consists of rising unemployment and low growth with higher inflation. Today, and we think for the foreseeable future, we have the opposite: falling unemployment, strong growth, and though high, what will likely be moderating inflation later next year.

Question: Can you explain transitory versus persistent inflation?

Persistent inflation refers to changes to the structural inflationary dynamic. We see three main reasons why inflation may be structurally higher in the coming years.

1) A reversal of globalization

2) Wage pressure

3) Baby boomers evolving from a generation of savers to a generation of spenders

Transitory is less time-dependent and is more a function of whether there are reasons why the inflationary impulse might subside. For example, it is likely that at some point manufacturing capacity will increase as employees come back to the workforce.

Ultimately, we think secular forces – deglobalization, wage pressures, the aging population– will tilt inflation above 2% for longer than expected. Additionally, transitory factors can become persistent if inflation expectations increase and remain elevated, creating difficult choices for the Fed down the road.