'All inflation starts off as transitory'

'All inflation starts off as transitory'

All inflation starts off as transitory, a word central bankers are going to be using more and more, the manager of Sanlam’s Global Inflation-Linked Fund has said.

Tom Wells told a Sanlam inflation webinar on July 15 that “all inflation starts by being transitory - it has to come from a low base.”

He added although inflation may turn out to be stickier than first thought, central bankers “will continue to call it transitory in order to erode this debt pile and to ensure that we don’t pull support from the economy too soon.” 

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Inflation overshot the Bank of England's 2 per cent target for the second month running in June, as it was up 2.5 per cent in a year.

Commentators at the time, including Richard Carter, head of fixed interest research at Quilter Cheviot, said despite breaching the central bank’s target it was still “likely that this bout of inflation won’t be sustained over the long-term”.

Wells highlighted how the past twenty years of a relatively calm inflationary environment were unlikely to persist given the current macro backdrop.

He said to this end, central bank activity had changed. Previously, he said, central banks would work from predictive models, seeing what the models showed for the future and changing policy accordingly. 

“[Central banks now] wait for the actual data to come through, see if there is a trend, see if it is entrenched and respond accordingly,” he said.

“That is a big shift in how we are conducting monetary policy.”

However, he added he does not see inflation running out of control as it did in the 1970s.

“A big driver of disinflation was globalisation, this has slowed significantly - in some sectors it has gone into reverse.

“The tailwinds we got, the disinflationary forces, are not over but it’s less windy, the tailwind is less strong. 

“It’s worth me pointing out that I don’t think we’ll return to 1970s levels of inflation - but there are certainly some transitory elements in the inflation basket, and other elements that are more sticky and keep inflation higher.”

He added: “Central bankers haven’t hit inflation targets for years, so we have a lot of room to run higher than the target.”

The debate over the nature of inflation has polarised opinion, with the investment managers of the Ruffer Investment Trust saying earlier this week that the transitory debate “misses the point entirely”.

In a year end review submitted to the stock exchange on July 19, the trust’s managers Duncan MacInnes and Hamish Baillie told shareholders that even if inflation is temporary, unless wages rise in tandem people will be financially worse off.

They said: "We think this 'transitory debate' misses the point entirely. 

“Of course, house prices will not rise at 10-20 per cent annualised forever. Inflation is simply a measure of the rate of change. If that delicious beer garden pint was £4.50 in 2019 and now it costs £6, it has inflated by 33 per cent. Next year it might cost £6.25.