Some of the world’s biggest bond investors say the market is wrong to expect central banks to score a long-term win in the war against inflation.
There’s little doubt that interest-rate hikes from policy makers in the US and Europe will pull consumer-price increases down from the fastest pace in decades by slowing economic growth or setting off recessions.
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But the retreat of inflation from its peak isn’t likely to mark a return to the price stability of the recent past because of stark shifts in the world economy, according to a broad group of investors and strategists at firms including Pacific Investment Management Co., Capital Group and Union Investment.
During the period of expanding globalization, cheap commodities and low labor costs helped keep inflation at bay. Now, that’s starting to reverse. Oil and gas prices are elevated as nations sever ties with Russia over the Ukraine war. Businesses are weighing political tensions while rebuilding frayed supply chains. And tight labor markets are giving workers the power to push for higher pay.
That has money managers who oversee trillions of dollars bracing for inflation to hold well above the roughly 2% level targeted by major central banks. To guard against that risk, they have been buying inflation-protected bonds, boosting exposure to commodities and expanding cash holdings instead of plowing it directly into bonds, wagering that consumer-price increases won’t quickly pull back to levels seen in recent decades.
“The last twenty years of the great moderation — that’s fully behind us now,” said Tiffany Wilding, North American economist at Pimco, which had about $1.8 trillion under management at the end of June. She anticipates a period of highly volatile inflation as the world adjusts to changes that will “lead to higher input costs in general that should result in a multi-year price level adjustment.”
Read the full article here by Libby Cherry, Liz Capo McCormick, Advisor Perspectives.
