The once-forgotten inflation story has now morphed into a fear-based page-turner, spiced up by intertwined psychological and financial factors, according to Pascal Blanqué, Amundi Institute chair.
In a just-released discussion published by the French investment giant, Blanqué says the public response to inflation has rapidly gone from ignorance to denial to surprise to acknowledgement
“Now we are reaching the next level: fear,” he says. “An inflation process, particularly when it starts from nothing as inflation is deeply forgotten, is a discovery process and a price for markets. Most people currently involved in economic life do not know what inflation is and have not been faced with any sustained period of rising prices and interest rates. This is a process of memory awakening and adaptive expectations.”
But Blanqué says while underlying economic trends may have triggered inflation, entrenched human psychological traits are now driving the process.
“We’ve seen inflation picking up in areas not hit by bottlenecks or energy, but simply due to a viral contagion of talk, narratives and stories on TV. The spread of narratives through media (a self-fulfilling phenomenon) has created anxiety and fear,” he says. “As happens in all initial inflationary sequences, social and political worries have risen rapidly, as inflation hits the poorest first, reinforcing and exposing pre-existing social divisions.”
And monetary authorities are unlikely to close the book on inflation before it takes off in the popular imagination.
“My thesis is that central banks’ DNA has changed: they will err on the benign-neglect side of the equation for various reasons, such as the asymmetry between growth and inflation, fiscal dominance and the financial repression framework of negative real rates,” Blanqué says. “Central banks are far behind and certainly won’t close the gap. At some point something will have to give.”
As inflation opens another chapter in history, the general public and investors will look to the past for clues about the future.
“It is not that history repeats itself and the phenomena are the same, but rather the psychology of people is relatively constant. People react in much the same way to comparable events,” he says.
“… These mechanisms are valid for people and investors. The latter are now looking for a portfolio construction which targets real rather than nominal returns. Real and alternative assets, high dividend stocks and flexible fixed income strategies will benefit from higher rates and will see strong demand growth in the search for real returns, which has become the new mantra.”
Blanqué also makes the case that “economics, and markets in particular, are made of words, discourses, images and battles of narratives”.
“Narratives must be included in what we call ‘fundamentals’ to get a more realistic description of what we observe. The media is an accelerator of the ‘virus’, as it usually presents the impressively worrying side of things, in this case inflation,” he says.
To be continued…