Investors need to prepare for structural inflation

Investors need to prepare for an inflationary pulse driven by rising wages, given an ultra-loose central bank’s policy in the US, according to Australian equities manager Chester Asset Management.

Wage inflation would remain the key to structural inflation, but other elements like de-carbonisation and localisation of supply chains (rather than globalisation) would be strong factors too.

Every policy direction in the US was geared around achieving full employment and there was strong desire to create wage inflation, which had been missing for the bottom 60% of the workforce for at least two generations, Chester’s managing director Rob Tucker said.

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“With the Biden’s administration’s stated desire to cut fossil fuel emissions in half by 2030, there is a clear global imperative to get to a carbon neutral position as quickly as possible. That’s going to need capital investment of US$2.8-3.5 trillion ($3.6-4.5 trillion per year for the next 20 years, which will add 3%-4% to global GDP every year,” he said.

Speaking on the localisation of supply chains, as a strong driver of structural inflation, Tucker said: “Along with increased automation, the globalisation thematic has been one of the driving forces behind the deflationary backdrop of the past 30 years. Companies are increasingly trading off the cheaper cost of goods with increased control of supply chains as well as IP security.”

The following are the four key strategies, according to Chester Asset Management, which would help investors respond to structural inflation:

  1. Buying real assets;
  2. Focusing on valuation;
  3. Looking for pricing power; and
  4. Investing in gold equities

Tucker also noted that cyclical factors were also at play in the inflation story, with the inflationary pulse of the economic recovery and accompanying supply chain constraints playing a significant role.

“There’s also the base effect of the oil price more than doubling, while copper and timber prices are also up significantly year on year, which all feed into the cost of manufacturing,” he added.

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