Two powerful conflicting forces have buffeted inflation this year: the deflationary impact from the implosion in economic activity, and the inflationary impulse from the loss of capacity in both the goods and services sectors. The net impact in the case of the U.S. has been a remarkably stable core inflation rate. Price weaknesses have been matched by price increases, leaving little net change in the underlying trend.
Unprecedented monetary and fiscal stimulus around the world have provided critical economic support, creating what we call a reflationary bridge until a medical solution is found. The process was described in a special just-published report, concluding that if the bridge succeeds, as is increasingly being discounted in risk asset prices, then the odds of higher inflation down the road will be much enhanced. Such an outcome would not really be a “black swan”, but it certainly would blindside government bond markets. While not a threat over the next 12 months, stay tuned.