After decades lying dormant inflation has picked up dramatically in most major economies over the past 12 months. Australia has so far lagged this inflation surge, though we expect local inflation to accelerate significantly through the first half of this year.
US inflationary pressures appear to be particularly acute, with the US headline inflation recently hitting a 40 year high of close to 8%. We expect US inflation will move higher again in March to peak at around 8.5%. While we see the March reading as the likely peak and expect a significant easing in the inflation rate over the next 12 months, there is still considerable uncertainty around the extent to which inflation eases from its current torrid pace.
So why has the inflation rate surged over the past year?
The recent increase in inflation appears to have been driven by a confluence of several inter-related factors, including;
- A significant disruption to the global supply chain.
- Unprecedented policy stimulus fueling above-trend demand.
- A significant shift in consumption toward production constrained goods markets.
- A surge in the cost of energy and other key commodities, most notably “soft” commodities.
- A rapid tightening in labour market conditions.
Against the backdrop of these drivers we assess:
- Whether the surge is transitory or structural
- The danger inflation is already re-ingrained in the system
- Investing against an uncertain inflation backdrop
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Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.