Inflation – will recent policy support change long-term trends?

February 2, 2021

Inflation risk is an important consideration for most investors for two principal reasons; first, high inflation can erode an investor’s purchasing power, second, unexpected inflation and high inflation during periods of slow economic growth have historically produced sharp declines in risk assets.

Most recently, inflation risk has been a key concern of investors since fiscal and monetary policy authorities unleashed record levels of liquidity and stimulus on the global economy in an effort to combat the economic shutdowns stemming from the onset of the COVID-19 virus.

While this is a reasonable concern considering the unique nature of this crisis and the aggressive response by policymakers, for the US inflation experience going forward, we expect that factors heavily influencing prices over the last few decades are still deeply entrenched in the economy. Also, these factors will ultimately overshadow the stimulus policies and continue to drive the benign inflation environment in the future.

In this newsletter, we will support this expectation by first highlighting the current state of inflation and then by reviewing several forward looking measures.

We conclude by considering the degree to which all of these expectations are reasonable and by highlighting a few recent developments that could potentially result in our expectation being wrong.