Sticky Inflation: Causes, Risks, and What It Means
- For investors, the risk of inflation seems equally so.
- Readers may pause when they see that the risk of rising prices placed third in this year's iteration of Risk.net's top 10 investment risks - our annual ranking...
- Judging by what economists say, the short-term outlook for inflation is nothing to fear.
Inflation can be notoriously persistent. For investors, the risk of inflation seems equally so.
Readers may pause when they see that the risk of rising prices placed third in this year’s iteration of Risk.net‘s top 10 investment risks – our annual ranking based on interviews with buy-siders. After all, inflation in developed markets has been falling and is projected too fall further. The US CPI print on January 13 was 2.7%. When we published our first Top 10 list four years ago, US inflation was 6.4%.
Judging by what economists say, the short-term outlook for inflation is nothing to fear. Look back at what investors have been saying, though, and it’s clear they see ample reasons to be concerned.
Inflation has been one of the top three risks in each of the four years the survey has run.Only geopolitical risk featured as often. What’s more, three of this year’s other top risks – government indebtedness, Federal Reserve independence and the rise of populist politics – feed into and fuel the likelihood of runaway prices.
Indebtedness, for example, may give rise to looser monetary policy. Fed independence plays a critical role in anchoring long-term inflation expectations. Populism is highly likely to give rise to more of the former and less of the latter.
The past four years of survey results illustrate how inflation has evolved from a largely theoretical risk to something deeper and more alarming.
Buy-siders that spoke to Risk.net in 2023 worried that inflation would prove hard to stamp out, primarily as inflation had proven hard to stamp out in the past.
A year later, Risk.net‘s top risks list included a public debt crisis for the first time. It has featured in each year since. Investors began to express unease about the interplay between inflation and government indebtedness, noting that politicians might one day prioritise low interest rates over stable prices.
“The only way out of this rising burden of debt relative to GDP is smaller deficits – or surpluses - a high growth rate, or low real interest rates,” a hedge fund chief investment officer told Risk.net at the time.
The first two would be hard to achieve, he said. As a outcome, governments could be forced to pursue policies of financial repression.That’s to say, they might encourage – or maybe coerce – central banks to hold bond yields down through unconventional means.