By the Investments Team of Fineco Asset Management
L’acceleration of inflation, and if this is only temporary, it probably represents the central theme for managers, central bankers and anyone who has to make choices on the markets in the coming years.
The pandemic and the will to support the economy in the recovery phase have produced bond purchases and low interest rates, in both cases on unprecedented levels: the duration of this support consequently leads to questions about inflation and its parable from here on out.
The same central banks they have recalibrated their mandates towards the inflationary element, believing that inflation higher than the target level at certain times can be considered acceptable, if not encouraged. Inflation expectations have certainly risen and various sectors of the economy are expecting prices to rise.
If central banks are no longer perceived as guardians of containing inflation, it is not surprising that there is a consensus on future price increases. However, if it is true that expectations of a rise in inflation have risen, historically these have not been excessively high.
Central bankers speak of a transitory phenomenon, driven by the consideration that it is a short-term factor due to the abrupt stop of economic activity in 2020 and the rapid recovery of 2021.
From a broader perspective, we observe how several times in the last twenty years periods of inflationary growth have been announced that have not materialized, to the point that those who had positioned themselves in response to these alarms were disappointed and absorbed losses.
There have been several reasons over the past two decades for the low levels of inflation, such as imports from China where labor and production costs have remained very low for a long time. However, these arguments are weaker today.
The strong theme of the skeptical of the return of inflation, globalization, it is no longer so convincing. As evidenced by Goodhart & Pradhan in their 2007 study ‘Demographics will overturn three decades-long global trends’, these ‘disinflationary’ forces were already in recession before the pandemic.
Certainly the longer inflation persists, the less easy it will be to define it as transitory: in this context, central banks must justify accommodative policies and at the same time monitor the persistence of inflation. The real problem for them it will be to contain inflation without upsetting the markets and throttle the recovery.
In this context they will go back to doing what they have always done, they will start to be less accommodating, but without any rush and observing inflation for months to come.
Today it therefore appears important for an investor have the right protection against inflation in the construction of their portfolio, either, for example, through ‘value’ shares, hitherto neglected by the markets, which tolerate rate hikes, or with strumenti inflation-linked that act as a shield against the corrosive effect of inflation.