Inflation has been one of the biggest topics discussed by the investing community over the past two years.
While many still debate persistent versus temporary inflationary pressures or the timing of a potential peak in inflation, consumers, companies and investors have had to deal with the practical consequences of rising prices.
The US, UK, and EU are experiencing year-on-year price increases in the region of 5 to 9 per cent almost every month this year, with many emerging markets fighting numbers significantly higher.
But how did we get here?
Various factors have contributed to inflation running at multi-decade highs all over the world.
It started with the Covid-19 pandemic, widespread lockdowns together with huge government and central bank spending, and subsequent surges in demand when businesses and economies reopened.
It continues with related supply chain issues, creating shortages in multiple industries.
Throw the Russia/Ukraine conflict into the mix and you also end up with very high food and even higher energy prices.
What creates a further headache for businesses is a tight labour market and continuously increasing wages, which together with higher input costs puts significant pressure on companies’ profit margins.
What we end up with are governments and policymakers trying to curb inflation by hiking interest rates and decreasing money supply in the economy; companies struggling with lower profitability; and a squeezed consumer battling high food, energy, and mortgage bills.
The markets suffer as a result and it is no surprise the investment community has been working hard to find interesting opportunities, which would not only stay largely unaffected by these issues but would also contribute to positive returns in their portfolios.
Is inflation structural and here to stay?
While it is unlikely we will see inflation in developed markets return to the low levels of 0 to 2 per cent seen in the previous decade any time soon, it is not expected to stay at these multi-year highs for very long.
Many of the drivers of increasing prices are temporary and are expected to stabilise in the short to medium term.
Supply chain issues resulting from lockdowns will become less prevalent, Covid-induced pent-up demand will normalise, and food and commodity prices should stabilise once the Russia/Ukraine conflict resolves, all of which together with the base effect should ensure inflation rates will gradually decrease.
It can be challenging for individual investors to watch the current market volatility, coupled with worrying macroeconomic news flow, and not think about liquidating some of their exposure or staying away from the market altogether.
We, however, advise our clients to keep a calm head and pay attention to the opportunities the current turmoil creates as well as keep focusing on the long term, as trying to time the market often creates even bigger issues.
Staying ahead of inflation
The fixed income market has been hit in the past six months by the rapid rise in US Treasury and other developed market yields.