Inflation: transitory or persistent?


Raf Choudhury

“The big talking point in the market at the moment is inflation. Over the last 40 years inflation has been generally contained within or below the targets we have seen set by central banks but recent signs point to higher levels of inflation around the world.”

“There are additional pressures as well. In March, US President Joe Biden signed a US$1.9tn economic relief bill that saw the government send US$1,400 cheques to most Americans. With increased levels of savings through the pandemic, consumers are itching to get out and be able to enjoy some retail therapy.”

“Long-term bond yields are up and have been on the rise since the start of the year with the yields on the 10 year bond in both the US and Australia having both risen by around 55bps.”

“Some argue that the current pick-up in inflation (the 12 month percentage change in the US consumer price index was around 5% as of the end of May), is transitory and point to events like the temporary closure of the Suez canal in March this year.”

“And it’s been commodities – often regarded as an inflation indicator as well as an inflation hedge – that have seen a rapid rise in prices over the last 12 months. Across-the-board, the rise in commodity prices to the highest levels since the start of the pandemic is creating increased cause for concern.”

“With the economic recovery underway, indications are now that we will see two rate rises by the end of 2023 but that is over a year away. In the interim, higher prices for raw materials will probably result in temporary inflation pressures and we expect to see inflation settle slightly higher than investors may be anticipating.”

Read the full commentary by Raf Choudhury – Head of Investment Strategy and Research.

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