A leading economist has predicted the current high levels of inflation around the world are unlikely to be sustained like those rates experienced in the 1970s.
AMP Capital chief economist Shane Oliver cited several reasons for this slightly more optimistic outlook about the current state of the global economy.
Firstly, Oliver noted central banks across the globe understand the problem and the need to keep inflation expectations down. To this end, he said they are committed to countering inflation, with the United States Federal Reserve indicating it will look to achieve this goal unconditionally, even if it means triggering a recession, and the Reserve Bank of Australia confirming it will do what is necessary to arrive at the same result.
According to Oliver, longer-term inflation expectations also give reason to be optimistic.
“While inflation is high, longer-term inflation expectations remain low (at 3.1 per cent in the US compared to nearly 10 per cent in 1980) and wages growth is still relatively low, suggesting it should be easier to bring inflation down than it was in 1980,” he said.
“Related to this, labour markets are far more competitive today with much lower levels of unionisation. In Australia, only 14.3 per cent of employees are in a union, whereas in 1976 it was at 51 per cent of employees.”
Finally, he pointed out there are already signs of easing cyclical inflation pressure in the US and that is usually a leading indicator for the next six-month period.
“So, while inflation may not go back to pre-pandemic lows and the longer-term tailwind for investment markets from ever-lower inflation and interest rates may be behind us, a full-on return to the 1970s’ malaise looks unlikely,” he noted.
He stipulated high inflation is negative for investors as it will lead to higher interest rates, which will in turn make growth assets less attractive and cash more attractive. It will also result in increased economic volatility and uncertainty, leading to investors demanding a higher risk premium for their investments, he said.
The flow-on effects of these two developments will be rising bond yields, which would lead to capital losses for fixed income investors, he noted.''