Page 14 - ISQ July 2021

INVESTMENT STRATEGY QUARTERLY

Q&A - Inflation: The Year of Disbelief

Jeremy Batstone-Carr, European Strategy Team, Raymond James

Setting the stage:

If 2020 was the year to forget, might 2021 be the year of disbelief? News headlines, certainly financial news headlines are more often than
not being driven by shrill fears associated with the return of an inflationary beast that most, if not all, had believed to have been conquered
forty or fifty years ago. What makes these fears all the more remarkable is the fact that inflationary pressure, as measured by Consumer
Price Inflation (CPI) metrics is not everywhere. Yes, it is apparent in the United States and in the U.K. too. But in Europe and in Japan it is
nowhere to be seen, with prevailing CPI metrics are comfortably below central bank target levels.

Q: Is this inflationary “episode” being driven by the so-called Q: Is it true that not all prices are rising?
“reflation trade”?
A: Absolutely! Whilst much attention has inevitably focused on cer-
A: Monetary theorists have always stated that if one produces tain specific “hot” pockets, such as used automotive vehicles

excessive stimulus, through interest rate cuts, balance sheet and commodity prices, the prices of other items haven’t budged.
expansion and especially when combined with significant fiscal Taking U.S. CPI as an example, of the 70 items comprising the
stimulus, then inflation will come storming back. Economic pur- “basket”, only five are seeing prices roaring higher while thirty
ists, especially those of a monetarist persuasion, will forever are seeing prices steady or still falling. Something similar is hap-
argue that inflation is a phenomenon created by monetary poli- pening in the U.K. too. It is perhaps important to add that other
cies. If a central bank prints money (expands the money supply), than owner equivalent rents, house prices are generally
then an inflationary episode cannot be far behind. Yet, the great excluded from inflation calculations (although there is a live
counter-weight to this view, historically, was globalisation. The debate at the European Central Bank about this subject right
inclusion of increasing numbers of emerging market economies now). For this important reason, it seems highly likely that CPI
into the manufacturing supply chains of the developed world metrics are not telling the whole story. The cost of living is rising,
worked incredibly well at keeping prices low. but inflation is not!

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