What would an era of higher inflation mean for markets?

What would an era of higher inflation mean for markets?

We expect underlying inflation in the US to be significantly higher over the next decade on average than it has been over the last one. Nonetheless, we don’t think that it will climb sharply from here, or that it will coincide with much weaker economic growth or tighter monetary policy. So, in our view, markets will not falter in the way that they did during some periods of high inflation in the past.
John Higgins Chief Markets Economist
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CE Spotlight

The rebirth of inflation?

The debate over inflation has become polarised between those who expect a return to the 1970s and those who believe inflation is still dead. The reality is more nuanced and inflation outcomes are likely to vary between countries. A new era of higher inflation is most likely to emerge in the US and perhaps the UK. But we think inflation will remain extremely low in the euro-zone, Japan and China. In those countries where we anticipate a sustained rise in inflation, the most likely outcome is that it increases to moderately higher rates of 3-4%. But risks are generally skewed to the upside and there is a real possibility that inflation increases to a much higher rate that would, in time, necessitate a more substantial tightening of policy.

30 September 2021

CE Spotlight

What would an era of higher inflation mean for currencies?

We think that a return to a regime of higher and less stable inflation in many major economies would result in a rise in exchange rate volatility and, over time, the depreciation of the currencies of those countries which experience higher inflation.

30 September 2021

CE Spotlight

Will US-China decoupling be inflationary?

China’s integration into the global economy contributed to the low inflation environment of recent decades. But it was not the major driver and, in any case, China’s integration peaked several years ago. Decoupling may be inflationary, but as long as it happened gradually, the impact would be small. Abrupt decoupling in key sectors would be a different story, sending prices soaring until new supply chains could be formed.

28 September 2021

More from John Higgins

Asset Allocation Chart Book

Developments in China shake up the outlook

Three key developments in China over the past month or so are worth highlighting, as they feed into our broader asset allocation forecasts for the next couple of years. First, what started as a regulatory crackdown on a handful of sectors seems to have morphed into a broader ideological campaign, with major implications for a wide range of Chinese companies. Second, distressed property developer Evergrande has slid further towards default, heightening concerns about the country’s construction sector in particular, and its financial system more generally. Third, China’s economy generally has shown further signs of slowing.

16 September 2021

Capital Daily

What to make of inflation and bond yields in the UK and US

The renewed rise in consumer price inflation in the UK reported today contrasts with the dip in the US announced yesterday. Admittedly, the former has risen from a low level, while the latter has eased back from a high one. But these outcomes have coincided with a recent relative shift in inflation compensation in the two economies, which has fed through to some underperformance of Gilts vis-à-vis Treasuries. We don’t expect inflation in the UK and the US to head in opposite directions indefinitely, though, and foresee a smaller rise in the 10-year yield in the former than the latter between now and the end of 2022.

15 September 2021

Long Run Update

What the S&P 500’s valuation may mean for future returns

Although the US stock market’s valuation is nearly as high now as it was at the height of dot com mania, we don’t expect the return from it to be as bad in the next decade as it was in the 2000s.

31 August 2021
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