Will inflation come back?
Bell believes that a rapid economic recovery will happen, but is sceptical that inflation will come through in a prolonged way.
He says: “As the economy opens up, demand will rise quickly, and inflation will rise, but it is like walking up a steep hill in the fog, you have no idea where the peak is. Very credible economists are predicting higher inflation but economists don’t have a good record of predicting inflation properly.”
He says the “scarring” left over from the pandemic will be seen in the empty shops and pubs that do not re-open, and this will put a lid on both growth and inflation rates.
Instead of the Lawson boom, he says the coming medium term economic outlook will be more like the1980s as a whole, with strong growth in some sectors, and weak growth in others, keeping the inflation and growth rates relatively low.
He says just as the recession was marked by some sectors doing well, and others doing badly, so will the recovery, but in the recovery phase, the opposite sectors may do well, relative to how they performed in the recession.
Simon Edelsten, who runs the Artemis Global Select fund, says markets have started to price in higher inflation, which has led to a sell-off of government bonds, and of tech stocks, and a rise in prices of valuations in more economically sensitive areas.
Bond prices fall when investors expect higher growth and inflation; this is because the fixed income from a bond is worth less if it is eroded by inflation, and less attractive if the returns from risk assets seem more secure as the economy recovers.
Falling bond prices mean higher bond yields. Technology company stocks have fallen because, according to Edelsten, an investor can get an assured higher income from the bond today, even if its low, rather than have to wait potentially years for the income from technology companies to come through.
Instead he is investing in companies which trade cheaply now, and where there is a clearer sight of where revenues and profits are coming through.
Page believes that inflation could come to the UK, but not because growth in the economy will be so strong it smashes through the output gap, but rather because he believes the UK’s trend rate of growth has fallen. He believes the pandemic has reduced the trend growth rate by 2 per cent, and Brexit has reduced it further.
In this scenario, the output gap is smaller because the long-term growth rate is smaller, and it only needs relatively smaller amounts of growth to lead to inflation.
But he says he expects inflation to weaken in the years ahead, as technology-induced changes are likely to lead to empty buildings and structurally higher unemployment as many of the habits of the pandemic become part of the new normal.