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Schroders' Chandler on lower-for-longer inflation

Schroders' Chandler on lower-for-longer inflation

Traditional indicators of higher inflation are being branded no longer reliable, amid warnings against stuffing portfolios with assets that perform best when inflation is high.

Traditional economic theory states the Phillips Curve shows the likely future direction of inflation - as unemployment falls, inflation rises.

Unemployment in both the UK and US is below 5 per cent. This should lead to greater levels of demand in the economy, which is inflationary, and as the number of unemployed workers falls, wages should rise.

The relative lack of underlying inflation in the UK, where the inflation seen so far has largely been attributed to temporary currency movements, and the US has puzzled economists.

Data released by the Office for National Statistics on 13 February showed that UK inflation was 3 per cent in December, unchanged from November, but above the Bank of England's 2 per cent target. 

The recent volatility in bond markets, where yields have risen, has happened as the market fears US inflation could be higher than was previously anticipated.

But according to Philip Chandler, multi asset investment manager at Schroders, the underlying theory of the Phillips Curve, and those investors who are buying assets to prepare client portfolios for inflation, are ignoring a change in the global economy.

He said the medium and long-term inflation rate of any country is now determined "by international factors", such as demand from emerging markets, with those being much more important than domestic levels of employment or wages in determining the rate of inflation in a particular economy. 

Mr Chandler believes the outlook for investors in the coming years "will be marginally lower than investors had perhaps become used to, and with a bit more volatility." 

Fund manager Neil Woodford, who runs the £7.2bn Woodford Equity Income fund, has said the boost in global GDP and inflation seen over the past year is the result of increased debt levels in China, a bubble he said will burst and export deflation around the world.

A lower inflation environment is also predicted by James Carrick, an economist at Legal and General, who has said changes in technology are deflationary, and create a force more powerful than national employment trends, to create deflation.

This echoes recent research from the Office of National Statistics, which stated that it underestimated UK GDP growth and overestimated inflation in the years 2011-2015.

But David Roberts, bond fund manager at Liontrust, said he thinks the impact of technological advances on the level of inflation is overstated, and he expects higher inflation from here.

David.Thorpe@ft.com 

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