The United States could enter an “era” in which inflation will remain significantly higher on average over the next decade, according to London-based research firm Capital Economics.
In a note this week, John Higgins, its chief markets economist, puts a new spin on the inflation debate, theorizing that price gains won’t necessarily rise sharply from here, or be accompanied. not weaker economic growth and tighter monetary policy. In this case, he says, the markets will not weaken as they did during past periods of high inflation.
The prospect of ever-higher inflation around the world is gaining ground after the leaders of the Federal Reserve, European Central Bank, Bank of England and Bank of Japan admitted on Wednesday that soaring hikes prices observed in many advanced countries this year may remain high for some. time. Over the past week, concerns about inflation and the prospect that the Fed may need to tighten monetary policy more aggressively in the future have been factors behind the rise in Treasury yields, which caused stocks to fall and the US dollar index to rise.
A crackdown on energy sector in China, record energy price in Europe and stacks of goods in California ports are some of the events that have prompted once-complacent investors to consider the notion of longer-term price gains, even if they haven’t yet been fully accounted for. Capital Economics’ forecast goes beyond the expectations of most companies, while examining the impact on bonds, stocks and currencies.
Read: The sudden realization that inflation could persist begins to be felt among many U.S. investors
âWe envision a future in the United States in which inflation is significantly higher than it has been over the past decade, but still only moderately above target; economic growth remains healthy as supply constraints ease; and the Fed isn’t pushing the brakes very hard, âHiggins wrote in an article titledâ What Would an Era of Higher Inflation Mean for Markets?
His firm’s basic view assumes that inflation will remain below 5% in most advanced economies and many emerging markets, although “the risks to that view are more on the upside than the decline, âhe said. The overall rate of the consumer price index in the United States could reach about 3% on average later this decade, compared to the level below 2% that prevailed in the 2010s. And US monetary policy could remain âVery accommodatingâ over the next few years, given the Fed’s flexible approach to targeting average inflation.
This means for financial markets that real, or inflation-adjusted, returns on safe, low-yielding US assets like Treasuries “will be paltry, if not negative” over the next few years or longer, according to Higgins. But those of the riskiest US assets, such as equities, âwill be positiveâ, even if real returns âare well belowâ the âspectacularâ returns observed since early 2020.
U.S. stocks rose on Thursday as Wall Street aimed to close the last trading day of September and the third quarter. The Dow Jones Industrial Average DJIA,
was down about 0.5% and the S&P 500 SPX index,
was down 0.1%, while the Nasdaq COMP composite index,
was up 0.3% at the start of the session.
T-bill yields stabilized, with the 10-year rate TMUBMUSD10Y,
hovered around 1.53% and 30 years TMUBMUSD30Y,
at around 2.08% – both still heading for the biggest monthly increase since March. Meanwhile, the US dollar index, DXY,
continued to hover around a one-year high.
For currencies, an era of higher and less stable inflation in many large economies “would lead to increased exchange rate volatility and, over time, depreciation of the currencies of countries with higher inflation.” , according to Jonas Goltermann, a senior market economist at Capital Economics.
Among the developed economies, the United States, the United Kingdom, Canada and Australia “are more at risk of sustained higher inflation,” Goltermann wrote in a note Thursday. This suggests “their currencies will weaken in nominal terms against the currencies of many European and Asian economies, where we expect inflation to remain subdued.”
Within the group of major emerging markets – with the exception of Argentina and Turkey, where inflation has already been in double digits in recent years – “Brazil, Colombia, South Africa, âIndonesia and the Philippines are at risk of a significant upturn in inflation, which would undermine their currencies,â he said.