The emergence of inflation is particularly hotly debated at the moment. Is the current uptick in commodity and other input prices sufficient to cause an inflation surge? Opinions differ widely, as is evident from the views of various asset managers.
Bert Flossbach of Flossbach von Storch does not believe inflation will rise significantly. ‘There is no danger of a sustained rise in inflation as long as higher inflation expectations are not firmly entrenched in people’s minds and, for example, are also a determining factor in wage negotiations. Only then would central banks be forced to adjust their extremely accommodative policies, or at least keep the prospect of doing so open’, he writes in a recent paper.
Labour market
In Flossbach’s view, the US labour market would have to improve significantly before this point is reached. The number of people of working age as a percentage of the population is still only 57.8% (March 2021), compared with 61.1% before the crisis, which in absolute terms means eight million fewer jobs.
Many jobs have presumably only been preserved thanks to the wage protection programme, which makes the official labour market data look a little better than they really are.
Flossbach says: ‘There is therefore no acute need for the US Federal Reserve (Fed) to reduce its bond purchases, especially since bond yields have already risen quite sharply and a further rise in yields could negatively affect the economic recovery.’
Nor should there be any fear that the European Central Bank (ECB) will do so this year, as the economic output of many eurozone countries will remain below pre-crisis levels despite significant support measures.
A significant, self-sustaining recovery in economic activity is needed before a less expansionary stance can be assumed. In any case, the ECB has ruled out raising interest rates until 2023 and even after that it has the discretion to tolerate any excesses of inflation by labelling them temporary.
In the US the Fed claims to have the means to control a rise in inflation. The recent downward movement in US Treasury yields seems to indicate that the market may be starting to believe the Fed and be less fearful of major inflationary pressures.
Uncertain
The strategists at Banque de Luxembourg Investments are in limbo. ‘In the short term, a normalisation of inflation seems almost certain. Due to the general decline in prices in March 2020 following the outbreak of the coronavirus, most price indicators will rebound in the coming months due to base effects. The sharp climb in commodity prices and the gradual reopening of economies will also contribute to higher inflation’, they say, pointing to rising inflationary pressures.
But the greatest uncertainty comes from the impact of budget support, they note. ‘This could bring about a paradigm shift compared to the situation before the coronavirus outbreak. Since stimulus measures used to be exclusively monetary and could not stimulate credit demand, monetary expansion ended up having little effect on real growth and prices.
However, when the government bypasses the banking sector by sending cheques to the population, it has an immediate effect on the real economy. Nevertheless, the impact on inflation remains difficult to predict.’