With the scale of monetary and fiscal stimulus introduced to the world economy this year, the potential for inflation has become something that many investors worry about.
“It has become easier and easier for governments to spend other people’s money because money is cheap,” said Foord. “And now you have modern monetary theory, which is being labelled by some people as the ‘magic money tree’. They have been able to find a tree where money grows, so politicians are lining up to spend this money and they are spending it now.”
However, there are, as yet, no signs of inflation coming through. Despite the scale of the stimulus, the factors most at play in the world economy remain deflationary.
Even though the development of vaccines does create the possibility for higher growth, Samy Chaar, chief economist at Swiss Private Bank Lombard Odier, sees a mild outlook. This is because of the competing forces at play.
“We expect inflation to recover, but to stay moderate,” said Chaar. “We think what’s going to happen with prices is that some of the very depreciated prices because of Covid, for example airline fares, should recover somewhat as restrictions are lifted by summer 2021. But some of the prices that increased in 2020, such as food at home delivery, should start getting back in line.
“So, you’ll have convergence,” he said. “Overall, we expect inflation to stay pretty well contained.”
Employment is key
Johanna Kyrklund, CIO at Schroders, is similarly sanguine.
“We’ve had this view that inflation isn’t a problem for a number of years,” said Kyrklund. “We’ve been in an environment where growth is very anaemic.”
This makes it difficult for inflation to shift higher rapidly because of how this is reflected in wage growth.
“It really comes down to employment,” said Kyrklund. “If we were to expect a rapid acceleration in wage growth, that is ultimately what would drive inflation.”
She however sees a number of factors against that happening. Technology and the demographics in the developed world in particular are suppressing wages.
While the size of the fiscal stimulus packages is enormous, they may also not be inflationary in the way one might expect them to be.
“The fiscal stimulus is replacing demand that was lost,” said Kyrklund. “It is filling a hole that was created. It is not driving people to spend more, but rather making sure people don’t stop spending altogether.”
With that said, even if inflation did return, Kyrklund doesn’t necessarily see it as a risk.
“If inflation picked up, initially it would be great for markets,” she said. “It would show that we’re not going down the same route as Japan.
“I think it would be very beneficial for equities in particular if it picked up. I would see it as bullish. It would cause a rotation under the surface, but ultimately it would be good news for me.
“It’s a risk I don’t worry about, because if it did come through it would make things better.”
Listen to this MoneywebNOW podcast by Simon Brown (or read the transcript here):
Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.
This article was first published on Citywire South Africa here, and republished with permission.