Inflation pressures will not be as transitory as central banks anticipate, according to investment managers from Tyndall Investment Management and Unigestion.
The consensus view in the industry appears to be that while prices have risen quickly over the past year in the US and the UK, the acceleration will slow down once the economy is back to normal and supply and demand reach an equilibrium.
However Felix Wintle, manager of the £54m VT Tyndall North American fund, questioned why market commentators have not defined what ‘transitory’ actually means – or when this phase of inflation started.
As such, he said: “There is a general irrelevance about what many of the talking heads on TV and in the media say, as there is no context to the debate.”
“In my view, the starting point for inflation is not when the media starts reporting on it or indeed when the Federal Reserve deigns to acknowledge it, it is when the rate of change in the data starts to inflect higher, and this happened back in autumn 2020.
“If we take this as the starting point, way before the consensus was talking about it, and say a reasonable definition of ‘transitory’ is six months, the question is moot as inflation has already been a factor for some nine to 10 months.”
Wintle admitted there are still some parts of the inflation picture that will correct over the next few months.
For example, he said used-car prices have seen some of the starkest rises in recorded history, but these are likely to come down again once bottlenecks clear. The same can be said for air fares.
“Lumber too, despite having corrected over 50 per cent from its recent highs, is still up 82 per cent on a year-over-year basis,” he added.
“But these are not material inputs to the CPI; much more important is the cost of shelter which counts for 33 per cent of the CPI alone.”
He highlighted how the cost of shelter has only just started to turn higher, and that it typically follows an increase in house prices which have been shooting higher over the last several months.
Source: FE Analytics
“The price of oil is another key factor in inflation and whilst this will eventually correct as it always does, it is now trending higher and has easy comps over the next several months,” he continued.
“Added to this there is the labour situation. As stimulus payments come to an end, this will have the effect of forcing people back to work, but back to jobs paying higher wages,” he explained. “These upward pressures on the cost of shelter, on the price of oil and on wages and labour are likely to keep inflation higher for longer.”
Meanwhile, Guilhem Savry, an investment manager at Unigestion, said another reason why high inflation could last for longer than expected is because of the Federal Reserve’s priority of reducing unemployment.
“This stems partly from the Fed’s average inflation targeting policy, but also from a biased risk-reward analysis driven by dovish members who think that it is less costly to cap inflation pressures if they occur than to adopt a highly detrimental proactive strategy that carries the risk of a new recession by tightening too early or too strongly,” he explained.
“As a result, in the coming months, the data to watch will not be inflation-related, such as production prices, wages or rent, but data reflecting the health and fluidity of the labour market.”
Savry believes a hawkish signal would come from a clear downward shift in unemployment-rate projections, not from a higher inflation forecast.
He said another important factor to consider is the difference between the “end of easy money”, which defines the start of a tightening cycle with the “end of easing”, which marks the end of a rate-cut cycle.
“In the first regime, the cost of borrowing increases and should rise in the future. In the second, this cost stops falling but should remain at a low level for some time.
“Historically, the ‘end of easy money’ has led to a repricing of both inflation and growth premia which negatively affects most assets and can trigger a correlation shock if the shift was not well publicised, as in 2013 or even at the beginning of 2018. Conversely, the ‘end of easing’ means that financial conditions remain favourable.”
The manager believes that the Fed communication so far has indicated it is moving towards an ‘end of easing’ mode, rather than a clear shift into an ‘end of easy money’.