Inflation is back in fashion but money influencers have yet to settle on a defining look for the recently returned financial fad.
Opinions range from the austere 1930s depression stylings of hyper-inflationistas to deflation doomsayers now relegated to the outskirts of hipness.
But, according to T Rowe Price chief international economist, Nikolaj Schmidt, investors are unlikely to see any 1970s high-priced model saunter down the catwalk any time soon.
“Contrary to some reports, we are not on the cusp of a return to the 1970s inflation inferno,” Schmidt says in a just-published review.
He says regardless of the label, unlike the fast-and-loose times of the ‘70s, central banks are well-placed to deal with the latest inflationary upsurge that hinges on three main trends:
- strong structural demand following a period of deleveraging;
- economic sizzle due to COVID-linked monetary and fiscal stimulus; and.
- supply-side constraints exacerbated by the Ukraine war.
Schmidt says monetary authorities have adequate tools to “control most of the causes of the inflation we see today” as well as the will to use them.
“… and this is where modern central banking bears little resemblance to the central banks of the 1970s. Inflation is a social choice, and by choosing independent central banks with clear inflation objectives and accountability, we have made the choice to keep inflation controlled,” he says.
Inevitably, though, the fight against inflation will drag economic growth down and markets will follow suit, Schmidt says.
“For participants in the financial markets, the bad news is that to bring inflation under control, central banks must tighten monetary policy to the point where growth slows to potential and, given our initial conditions, probably somewhat below potential. When growth slows sharply, particularly when it is accompanied by rising interest rates, financial market volatility usually ensues,” he says.
“There’s no getting around this, I’m afraid.”
In short, whatever form inflation 2022-style takes investors will just have to wear it: but if Schmidt is right, at least it won’t involve flares.