With continued volatility and an uncertain immediate future, is inflation a long term fixture?
Is inflation here to stay?
Inflation has been the topic for many investment managers over the past few weeks. Concerns over rising yields and its impacts on stock prices has created spikes in volatility. Furthermore, the reluctance of Jerome Powell to alter his monetary policy stance sent stocks further down with the Nasdaq dropping roughly 2% earlier this week.
Inflation is the increase in price of goods and services within an economy and has a relatively inverse relationship to interest rates (low interest rates tends to cause higher inflation). Inflation is commonly associated with the Goldilocks term ‘just right’ as it usually causes damage when it increases too much due to the eroding effect it has on the purchasing power of money. Equally when inflation falls (deflation), it also has negative effects such as hoarding of money and falling company profits. Therefore, inflation is usually targeted within a specific range to ensure the smooth functioning of economies.
Concerns currently revolve around the scale of accommodative policy and many believe that when economies do reopen, pent-up demand will only exacerbate inflation which is why we are seeing jitters in markets as of late. Further to this, supply constraints have placed upward pressure on commodity prices which is likely to continue as economies look towards rebuilding and transitioning their economies towards a more sustainable future. Commodities are used as inputs by businesses across the globe, therefore an increase in price of commodities is likely to pass-through eventually into prices thus creating higher inflation.
In summary, it is likely we will experience continued interest rate volatility over the coming months as markets interpret the future direction of inflation amidst the presence of rising yields. Whether or not governments will be forced into hiking rates earlier than expected is the worry but for now it doesn’t seem likely that current inflation expectations will alter policy in any fashion due to the outlook for employment. However, don’t be surprised if we see spikes in the near-term as investors speculate on this possibility.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.