Consumers warned on ‘transitory’ inflation

Inflation is looking less transitory than expected, according to a panel of fixed income experts, and consumers are underreacting to central bank’s abilities to control it.

Speaking at the Australian Institute of Superannuation Trustees (AIST) conference, Karen Ward, chief market strategist EMEA at J.P. Morgan Asset Management, said the supply/demand logistic problems looked like a short-term issue but employment problems were decidedly more long-term.

“Supply is finding it very difficult to meet demand and delivery times are very problematic which is putting pressure on prices, this is a short-term factor but could go well into 2022. This is what central banks are saying is transitory as this factor will dissipate,” Ward said.

“But the snapback in strength in demand means employment has snapped back very strongly, it is more difficult to employ someone now than it has been in the last few decades so wages are going up as a result. Wages are feeding the inflation story for the next year.

“This will lead to a market rotation, it will be difficult for fixed income for sure to cope with the duration risks but equity markets will be OK. You will see a change in leadership, it will be good for financials and less good for technology. That will then dictate other rotations such as a value comeback and those sectors such as Europe and Japan doing well because they are weighted towards a value comeback.”

All speakers on the panel agreed people were underestimating inflation and mistakenly deciding it would only be temporary.

“Consumers and the markets don’t care that much, maybe they should care more as this isn’t normal but the positive view is that central banks are considered credible,” Gilles Moëc, AXA group chief economist, said.

Asked what he considered as being ‘transitory’, Moëc said it would be if inflation could reach 5% to 6% without having an impact on long-term inflation expectations.

Ward said: “The idea that central banks have it all under control and will be able to stamp out rising inflation is not politically credible, it is not realistic”.

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