通脹：是否快要出現？（只供英文版）

We haven’t had a sustained period of price rises for years. Could the coronavirus be the catalyst that finally lets inflation loose? Now may be a useful time for investors to think through the portfolio implications of a more inflationary environment.

What causes inflation?

The massive stimulus implemented by central banks to help economies recover from COVID-19 has sparked speculation in some quarters that inflation may follow. Traditional economic theory certainly suggests that a major expansion of central banks’ balance sheets should drive up prices.

However, the relationship between money supply and inflation only holds over multi-decade periods. In the shorter term, inflation is tough to predict. That was amply demonstrated following the 2008/9 Global Financial Crisis (GFC), when widespread forecasts that prices would start increasing – in response to super-accommodative monetary policies – proved wide of the mark.

That inflation has been subdued in the decade since partly explains why many investors seem sanguine about the inflation outlook now. We hesitate to write these words, but this time it could be different: we see a significantly higher risk of inflation in the next 10 years than in the last 10.

OECD inflation (CPI) 1971 - 2019

Source: OECD

Why 2020 isn’t 2008

Remember ‘Helicopter Ben’? That was the nickname given to former US Federal Reserve Chairman Ben Bernanke, whose strategy following the GFC was to shower the US economy with money. Partly because of his policies, the US monetary base expanded 5.5x between January 2008 and November 2020, while the Consumer Price Index rose only 20%.

So why haven’t prices increased in response to the expansion of the money supply? One theory is that, to get going, inflation requires a double-whammy of monetary expansion and the right policy environment. Specifically, governments must be:

• Targeting fiscal expansion while being reluctant to impose higher taxes to pay for it.
• Aiming to lower the unemployment rate.

We didn’t have these twin policies following the GFC. But we do now, implemented by governments trying to deal with the immense economic and social challenges of the pandemic.

Two other developments make inflation more likely:

• The shift by many central banks to ‘make-up’ inflation strategies, under which inflation is allowed to run above the target to compensate for periods when it ran below it (until very recently, most central banks aimed always to keep inflation below the target).
• The retreat from globalisation, which for many years has held down prices by allowing companies to shift production to low-cost locations.

In combination, these factors could finally unleash the inflationary consequences of the money-supply expansion following the GFC and the coronavirus pandemic.

Why 2020 isn’t the 1970s

That said, we don’t expect a re-run of the soaraway prices of the 1970s. That type of inflationary episode is extremely unusual, because it requires a set of circumstances that come together only very rarely:

• Significant inflations ferment over many years and require multiple policy missteps based on analytical errors.
• They result from a concatenation of numerous factors, both domestic and international.

Moreover, certain specific drivers of the 1970s inflation, such as a supply-side oil shock, are unlikely to recur. So we see a very low chance of runaway prices now. Nevertheless, today’s economic and social backdrop, which we explore below, might be conducive of modestly higher inflation than has dominated the post-GFC era to date.

Some inflation-limiting factors are weakening

As economist Edward Yardeni has put it, there have been four powerful deflationary forces in recent decades: détente, disruption, debt and demography – to which we would add ‘disparities’. Some are intact, but others are weakening.

If conflict is inflationary, peace is deflationary. The years immediately following the GFC generally featured cooperation among the major global powers.

Status: détente seems to be ending, with superpower competition in security and trade intensifying. This is likely to contribute to inflation pressures.

The shift to e-commerce is thought to have subdued inflation by increasing price competition (by as much as 0.23% every year, according to one study1). Other disruptive technologies, such as automation and artificial intelligence, are believed to have similar effects.

Status: intact.

In the short-term, consumption and GDP growth accelerate when debt levels rise. But in the longer term, increases in household debt have the opposite effect, reducing growth rates. Debt has been rising in much of the West.

Status: intact.

Demographic trends – specifically, rising life expectancy and falling birth rates – are thought to be disinflationary. But the jury is out on the extent to which these effects are offset by related trends, such as the growing participation of women in the labour force.

Status: studies suggest demographics’ impact on global growth peaked in the mid-2010s. If that’s right, this check on rising prices should weaken.

Wealth inequality has increased in recent decades. This depresses inflation because richer people tend to save a bigger proportion of their income; consequently, concentrating wealth in their hands reduces consumption.

Status: intact, but a wild card. Global coordination of tax policy could start to weaken or even reverse the ‘rich-get-richer’ trend.

Taken together, we think these five factors suggest that the outlook is for marginally higher inflation, but still in the context of a period of low inflation.

Pressures building in the US?

Finally, we take a deeper dive into the inflation outlook for the US. Several dynamics suggest a higher chance of inflation following the COVID-crisis than after the GFC, including that:

• The millennial generation (20-40) is now forming households and taking on debt; the deflationary impact of the baby-boomer generation is weakening.
• The banking sector is healthier than after the GFC, with a greater ability to lend.
• The US government appears more willing to expand its balance sheet, while (as noted earlier) the US Federal Reserve is likely to let the economy run ‘hot’.

In our view, inflation looks more likely in the US than in other major economies, given the stronger deflationary headwinds in Japan and the eurozone, and China’s more balanced inflationary outlook. We contrast the status of inflationary/deflationary pressures in the US now and following the GFC via the traffic lights below (green is pro-inflationary, red is deflationary, and amber is neutral).

Inflation: prepare for the risk of a modest return

Overall, we think the chances of inflation taking hold in the next decade are significantly higher than they were after the GFC, particularly in the US. Inflationary pressures are mild at present and we don’t expect a return to the 1970s. Moreoever, inflation tends to take time to get going. But investors should keep a close eye on inflationary dynamics and be prepared for how they may affect portfolios. In the next article, Ninety One’s investment teams share their own views on inflation, and explain how inflation would impact different investment approaches and asset classes.