ETF Scan: The Big Picture final - Page 18

Inflation Perspectives

Inflation has been the biggest challenge facing investors in 2021 and looks set to continue to divide opinion as we head into the new year . Highlighting this , 41 % of respondents predict there is set to be an inflationary regime change while 44 % believe this bout is simply transitory and 15 % said they were “ unsure ”. In response to this , ETF Stream asked experts with opposing views to explain how they currently view global inflation as well as the impact it will have on markets in 2022 .
Inflation has been viewed as transitory by some while others believe it signals a regime change . What is Amundi ’ s view on this ?
The return of inflation was a key theme of 2021 and at Amundi , our conviction since Q3 has been one of a regime change . Globally , the discussions around transitory inflation have recently given way to a more permanent inflation narrative .
A critical moment was the change in stance of the US Federal Reserve in early December , indicating that inflation will not be transitory . As this survey shows , investors expect inflation challenges to continue . ETF flows within the last quarter of 2021 reflected this as US inflation-linked bonds were the favoured government bond strategy for ETF investors in Europe .
Our view for 2022 is a scenario of persistent and sticky inflation – higher than pre-COVID-19 levels for the US and eurozone countries .
Although there is a transitory element to the inflation story , there are still multiple factors shaping the persistent inflation narrative . First , “ stagflation ” – this is the combination of post-pandemic growth combined with sustained high inflation in a non-recessionary scenario . Secondly , “ de-synchronisation ” refers to the differentiated roles and behaviours of various economic actors such as tax authorities , regulators and central banks . For example , where there was an accommodative approach from monetary authorities , greater government intervention may now be required .
Laurent Trottier
Global Head of ETF , Indexing and Smart Beta Management Amundi
Why do you believe there will be an inflation regime change ?
After years of quantitative easing that has largely failed to stoke any form of sustained inflation , it is reasonable for investors to be sceptical that this time will be different . Perhaps one of the reasons for inflation failing to take off previously has been driven by globalisation such as cheaper materials and labour from the emerging markets .
The COVID-19 pandemic has led to a reconsideration from corporations on how to manage supply chains , moving towards more local markets . With the exception of technological improvement , all indicators point towards inflation being persistent , at least for a little while – unemployment is low , wage growth is picking up and global supply chains have been hit by shortages .
Even if it is transitory , it will likely stay higher for longer . For example , train tickets form part of the inflation basket and given train prices often increase in line with inflation , it can easily create a vicious circle . Given inflation has been so low for so long , indications from central banks are that they will let it run ( or at least a little bit !).
Matt Brennan
Head Of Investment Management AJ Bell
Why do you believe inflation is transitory ?
Federal Reserve Chair Jerome Powell retiring the term ‘ transitory ’ highlights the difficulties in defining terminology and in putting time frames on a dynamic situation . Replacing the term transitory with ‘ pandemic related ’ helps to avoid arguments over semantics and acknowledges the uncertain time horizon , particularly with the emergence of new variants of corona virus .
It seems likely that the higher inflation prints we are seeing reflect pandemic-related factors . Government support to incomes and the shuttering of much of the service economy led to a shift in expenditure from services to goods , with services more likely to suffer from supply chain issues which have been a big factor behind the higher inflation figures .
It is impossible to know when this will end , and the emergence of new variants could prolong pandemic related inflation on the supply side , although it seems unlikely that governments will repeat the huge fiscal support measures seen previously .
Overall , it seems likely that the long-term structural drivers of low inflation are likely to return to the fore at some point . This is effectively what the bond market is telling us , although it has to be acknowledged that there is not much room for error in longer-duration bond pricing should inflation turnout to be more than pandemic related .
Wayne Nutland
Head Of Managed Index Solutions Premier Miton
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