Not So Transitory – November 1, 2021

A just-published report noted that there is a wholesale change in sentiment towards inflation underway. The assumption that this year’s surge in inflation would unwind once economies re-opened is now being challenged, an outcome that we have been anticipating.

The key misread by both central banks and government bond investors, in our view, is that the rise in inflation is not solely, or even mostly, driven by temporary supply woes. The latter are contributing, no doubt. However, the bigger issues for inflation, which emerged late last decade before receding due to a protectionist-driven global trade downturn and then the pandemic, is that demand is solid and economic slack is unwinding. The latter is likely to turn positive next year, on track to reach the highest level in decades in most developed world economies.

Recent data has confirmed that inflation in the U.S. and euro area (and many other developed economies) has resumed the uptrend that took hold in the late-2010s. We do not envision a return to the hyper-inflationary 1970s, but expect a decade that will be profoundly different than the last two, with underlying inflation grinding higher against a backdrop of more resilient growth. Perhaps today’s bond zealots will eventually become vigilantes. Stay tuned.


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