This article is intended for Institutional Investors (as defined in the Securities and Futures Act, Chapter 289 of Singapore) only and is not suitable or intended for persons who do not qualify as such.
The COVID-19 pandemic has revived a familiar conversation about the inflation genie escaping the bottle. The speculation is similar to the one that surfaced in the immediate aftermath of the Global Financial Crisis and at various points since then: That we are likely to experience a burst of inflation in the coming years.
Cynical investors will dismiss this risk out of hand. We urge caution in dismissing it, particularly given the unusual – bordering on the unprecedented – nature of the coronavirus shock and the size of the policy response.
That said, our base case for the medium term is that the inflation problem we will face in the years to come will look a lot like the one of the recent past – namely, too little inflation.
However, we think that the probabilities of both much too little and too much inflation have both significantly increased, thanks to the pandemic.
In the very short run, inflation is being driven by two idiosyncratic factors:
We are interested in where inflation will be from the second half of 2021 onwards. By that time, these base effects should have washed out.
Rather than making bold claims, we believe it is better to explore the drivers of inflation and tease out the potential risks around the prevailing view among most investors: Inflation will not, and perhaps even cannot, return.
We believe these are the potential drivers of the much too weak and too strong inflation scenarios:
For more on our views on inflation:
Or listen to our latest Market Weekly podcast, ‘Much too little inflation or too much inflation’
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