Global inflation expectations

‘To look after households, consumers and investment spending asks for low interest rates; to deal with inflation asks for high interest rates. So there you have the perfect economic dilemma’: Adrian Saville – investment specialist, Genera Capital.

FIFI PETERS: Inflation is expected to be a big talking point this week as about 20 central banks meet to decide on their latest action to tackle higher prices in their respective economies. We are getting an update on which central bank may say what, and what this could mean for our Reserve Bank which will meet in January next year, from Adrian Saville, investment specialist at Genera Capital.

Adrian, always a pleasure, sir. With the number of central bank meetings that will be taking place this week, which ones will you be focusing on – and why?

ADRIAN SAVILLE: Great to be with you, Fifi. Thanks for having me on the show. The ones always to look out for are the usual giants, the [US] Fed, the European Central Bank or ECB, and the Bank of England. Those are the big needle movers in this environment. The Bank of Japan is also worth keeping an eye on. All of those are ‘usual suspects’.

I think more than watching their action, we’ve got to watch their language because the language has become increasingly sort of hedging their bets, and it’s clear that they are changing their minds. If you rewind just three or four months, there was a fairly emphatic view and a shared view among all of the big banks that inflation was what they were calling. And now you can use eCommerce transitory – in eCommerce. It’s evidencing itself increasingly that this inflation isn’t transitory, and that some of the elements that are causing this inflation are becoming fairly embedded, entrenched in the system.

FIFI PETERS: Talking about the Bank of England, I recall their last policy meeting. They kind of caught everyone off-guard. The market was expecting that they would start on their hiking cycle, to increase interest rates. They decided to remain on hold, citing uncertainties regarding the economic situation.

I think I read that the latest new cases of Covid totalled 50 000 or so on Sunday [December 12, 2021]. Now you have a situation in which Omicron has potentially added to that level of uncertainty. How are you expecting them to move this time around?

ADRIAN SAVILLE: I think that’s exactly the horns of the dilemma that they’re caught on; in good economic fashion there are two hands here.

On the one hand they’ve got inflation that they’re trying to put a lid on and on the other hand they’ve got an economy that [wants] to restart itself; and they’re trying to look after households that are financially strained – which means you don’t want to hike interest rates. Consumers are strained, you don’t want to hike interest rates, and you want to encourage investment spend now. To look after households, consumers and investment spending asks for low interest rates; to deal with inflation asks for high interest rates. So there you have the perfect economic dilemma.

My sense is that they are likely to continue to err on the side of caution and deal with the enemy of inflation rather than deal with the enemy of unemployment and the economy stalling – especially given this sort of consistent unyielding, unrelenting second wave, third wave.

Now I see Boris Johnson speaking about what he called the ‘tidal wave’. That’s the extent of their anxiety. He was talking about this now ginormous wave with a million-plus infections.

So they remain very, very cautious. But keep in mind that government policy is distinct from central bank policy.

FIFI PETERS: The US Federal Reserve – you mentioned the change in words and the change in tone. Given the US inflation numbers that came out on Friday, while largely expected how do you think they are likely to move against prices that are now at their highest levels, I believe, in 40 years?

ADRIAN SAVILLE: The last time you saw this type of inflation in the US was in the early 1980s. There’s a really important message here for people in business, for investors, perhaps particularly those who for a long time have worked in an environment, invested in an environment, allocated capital in an environment globally where inflation has been low and stable.

You have to rewind 40 years to find this type of inflationary surge. This brings a bunch of risks to the investment environment. Most obviously inflation is persistent in eroding your real wealth, so that brings an entirely different lens to how you approach investment problems. But what it means for the US Fed specifically is, I expect, that they are going to remain fairly conservative and on the back foot, and they’re going to talk as if they are coming with a fire hose to deal with inflation.

But I think they are more likely to act in a very conservative way, worrying more about the economy than inflation. In and of itself that actually reloads the system or reinforces the system with an even greater inflationary risk. So I think that this is a real component that is going to stay resident for the foreseeable future.

FIFI PETERS: All right. I think this is one arena where the phrase ‘talk is cheap’ doesn’t apply. Adrian, we’ll leave it there. Thanks so much for your time. Adrian Saville is investment an investment specialist at Genera Capital

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