Concerns about runaway inflation may well be unfounded
Many investors have started questioning the long-held “lower-for-longer” interest rate consensus as inflation has crept up in the US and Europe. Unease about runaway inflation may not be warranted, however, says AEW, as some leading macro and demographic trends are likely to have a dampening effect on inflation. Inflation has increased to 5 percent in the US and over 2 percent in the euro zone and the UK, causing concerns that central banks will use aggressive interest rate hikes to fend off further price rises.
To alleviate this disquiet, AEW has pointed out that the traditional positive relationship between inflation and government bond yields has not materialised to date, with recent bond yields remaining stable despite inflation picking up considerably. In the manager’s eyes this implies that inflation will be transitionary.
Three other factors should serve to reduce concerns. Firstly, there is an increasing need for seniors to save more for retirement,