Inflationary forces are unlikely to be easily tamed this time around, says Stephen Auth, executive vice-president and chief investment officer, equities, at Federated Hermes. The causes of the current high inflation of the last 18 months are, unfortunately, not all of one source and likewise not easily snuffed out. On the one hand, a number of the COVID-response policies here and elsewhere, particularly the trillions spent on relief funds, the multitrillion dollar expansion in central bank balance sheets, and the maintenance by the U.S. Fed of a zero interest-rate policy for far too long than needed are all now shifting in reverse, and “that’s a good thing,” he says. Together, these pullbacks on demand stimulus already are beginning to bring most inflation indicators off their peaks. The problem, though, is that the inflationary pressures are not just due to excess demand; they are also being driven by insufficient supply, particularly of workers. With baby boomers retiring by the millions, and many younger workers reluctant to enter the workforce or take full-time jobs, this gaping differential between growth in the economy and the labour force has made many companies reluctant to cut back on workers as they normally would when the economy slows. So, the labour market remains tight and upward pressure on wages high even as the rocky landing continues.
- PWC