The asset manager for a changing world

Cynical investors will dismiss this risk out of hand. We urge caution in dismissing it, particularly given the unusual – bordering on the unprecedented – nature of the coronavirus shock and the size of the policy response.

That said, our base case for the medium term is that the inflation problem we will face in the years to come will look a lot like the one of the recent past – namely, too little inflation.

However, we think that the probabilities of both much too little and too much inflation have both significantly increased, thanks to the pandemic.

The short term: Two atypical drivers

In the very short run, inflation is being driven by two idiosyncratic factors:

We are interested in where inflation will be from the second half of 2021 onwards. By that time, these base effects should have washed out.

Rather than making bold claims, we believe it is better to explore the drivers of inflation and tease out the potential risks around the prevailing view among most investors: Inflation will not, and perhaps even cannot, return.

We believe these are the potential drivers of the much too weak and too strong inflation scenarios:

The output gap between demand and supply

Costs (not reflecting the output gap)

Pricing power

Indirect taxes

Inflation expectations

For more on our views on inflation:

Read ‘The inflation genie: Understanding the drivers of much too little and too much inflation scenarios’.

Or listen to our latest Market Weekly podcast, ‘Much too little inflation or too much inflation’