Rising prices are demanding attention from investors and consumers but the underlying forces responsible for rising inflation may not be widely understood.
Michael Bazdarich, Product Specialist and Economist at Western Asset, part of the Franklin Templeton group has moved to dispel six common misconceptions regarding the dynamics of inflation related to the money supply, GDP, employee wages, the labor force, the supply chain, Federal Reserve policy and more.
With inflation reaching levels not seen in 40 years, Bazdarich has issued his insights using in-depth analysis using both recent data from the U.S. and historical examples,
Key takeaways from the paper include:
- Any run of higher prices caused by supply disruptions or even overly expansive fiscal policy should soon run its course.
- Supply-chain disruptions do not have to vanish for the price process to reverse; disruptions need only to ease.
- There is no evidence for increases in wages autonomously driving higher inflation.
- With demand for goods and services still restrained, higher wages should not drive higher prices.
- Without an acceleration in demand growth and with a normalisation of supply and supply growth, goods prices must moderate, even decline.
- Aggregate demand has not shown any acceleration from pre-COVID-19 trends, contradicting the contention that Fed policy has caused the economy to run too hot.
Bazdarich said an enduring pillar of its fixed-income investment strategies at Western Asset was its position on inflation and how it thinks inflation will evolve.
In conclusion, Bazdarich said: “I regard the success of the US and other DM (developed market) economies in finally stemming the inflation of the 1960s and 1970s as the major policy success of the 20th century.
“It has certainly been a driving factor of our investment strategies for the past 40 years. I never approved of the Fed’s stated intent to raise inflation—even a little—when it voiced such desires a few years ago.
“Having said that, I think the various efforts to blame recent price increases on the Fed or other external forces requiring a policy counter-response are lacking in support from both theory and fact. Fed and DM central bank policies in general were unable to stimulate either economic growth or inflation during the post-GFC period.
“I see nothing different in the COVID-19 era, other than the added complexities introduced by the related economic shutdown. I believe the recent price burst will die out of its own momentum, or lack thereof. I do not think it will be an enduring problem for the fixed-income markets.
