Since the first announcement in November 2020 that a Covid-19 vaccine was ready, market participants have become bewitched by thoughts of inflation, as the prospect of economies reopening, combined with huge government spending increases and low interest rates, created the potential for a sharp rebound in growth, and inflation.
The most recent inflation data for the US shows prices have risen by more than 4 per cent, when the Federal Reserve’s target is 2 per cent.
The most recent data from the UK shows inflation has doubled to 1.5 per cent, below the Bank of England’s target of 2 per cent, but even then, the data was flattered by the UK government having reduced VAT during the year on certain items.
The market reaction to both of those pieces of data was a swift sell-off of equities and particularly of those areas of the market regarded as most sensitive to a rise in bond yields, while those areas that do best when economic growth is strong have rebounded.
Barry Norris, founder and fund manager at Argonaut Capital, says the reason technology shares have been selling is because "for most of the past decade, when there was no inflation, the only companies that had any sort of pricing power were technology companies selling products or services that were hard to replicate.
"But as inflation picks up, more companies will have pricing power, so you don’t need to pay high valuations for it, and that's why those types of stocks have sold off.”
Much of the inflation data we are seeing right now is transitory, according to George Lagarias, chief economist at Mazars, and comes about as a result of inflation being negative for much of 2020 and early 2021, which essentially makes much of the data this year look more stark than it is.
Lagarias says: “Central banks think the higher inflation we have now is transitory. And history shows that hyper-inflation only really happens when currencies are falling in value, which is not really a feature for the dollar now.”
He says the more medium-term outlook for the US and global inflation will, to a large extent, be determined by whether US President Joe Biden can secure sufficient support for his planned $4tn (£2.8tn) stimulus, which would be in addition to spending packages already announced.
Many market participants take the view that stories of inflation past will not be repeated this time as ageing populations, the impact of technological change, and high debt levels mean that the long-run outlook for inflation is fixed at a permanently lower level.
But John Leiper, chief investment officer at Tavistock, says the view that "it's different this time" makes no sense because the circumstances have changed. Previously (since the 1980s) the focus has been on controlling inflation, even if this meant economic growth was weaker, but as a result of the pandemic, governments are becoming more active in the economy, paying less attention to rising inflation and instead prioritising growth.