The 2% inflation era is over
Monetary policy tightening continues across all regions. The inflation problem is a global problem, and therefore the inflation fight is a global fight.
As policy rates across almost the entire planet move higher and higher, demand destruction will materialize, slowly at first due to the lag effect, but then explosively.
In the US, the central bank moved the policy rate up by 0.75% to 4.0%, making this rate hiking cycle the sharpest in history. In England, the central bank increased its Bank Rate by 0.75 % to 3%. Meanwhile, Norway’s central bank raised its main policy rate by 25bp to 2.25% this week.
Inflation and inflation expectations at elevated levels, if entrenched, become a serious and complex problem with multidimensional negative spillovers. Unfortunately, as Jay Powell said this week:
“We don’t have, you know, a clearly identified, scientific way of understanding at what point inflation becomes entrenched (…) The thing we need to do from a risk management standpoint is to use our tools forcefully but thoughtfully and get inflation under control, get it down to 2%, get it behind us; that’s what we really need to do and what we are strongly committed to doing.”
(FOMC Press Conference November 2, 2022)
In the fight against inflation, there will be several casualties, growth, jobs, margins, and prices of growth assets. We expect policy rates to move higher and stay higher for an extended period, unlike the Fed and all the other central banks, which are expecting to engineer inflation back to 2%.
The 2% target in a world where secular inflation is setting in and rising is not an achievable target any longer. The 2% inflation era is over. Below is the list of factors influencing secular inflation forces from our GMG Insights Secular inflation is the new normal — get ready (August 18, 2022).
From an investment and portfolio implications perspective, the inflation fight and the higher inflation era pose a challenge. We continue to be defensively positioned across all our discretionary mandates and have allocations to asset classes and regions which we expect can benefit from a higher inflationary environment and further geopolitical fragmentation — one of the key factors triggering secular inflation.
The chart below shows the US central bank policy rate in black rising sharply this year compared with the Fed’s projection for the policy rate in green and the longer-run projection in red. Inflation in the gray line should be viewed and compared with where the Fed expects it to be, the yellow line. Indeed monetary policy works with a lag, and the lag depends on many variables, including the efficiency and efficacy of the monetary and financial transmission mechanism. However, we believe the projections are unattainable.
The information provided herein constitutes marketing material, that may contain general information, and has been prepared by personnel in GMG Asset Management SA (collectively “GMG”) and is not based on a consideration of the prospect’s circumstances. This document reflects the sole opinion of GMG or any entity of the GMG Group and it may contains generic recommendation.
Non-Reliance: This document does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your circumstances and, if necessary, seek professional advice. GMG is not soliciting any specific action based on this material it is solely intended for illustration purpose.
This document is not the result of a financial analysis and therefore is not subject to the “Directive on the Independence of Financial Research” of the Swiss Bankers Association.
This document is neither a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other exchange or regulated trading facility in Switzerland, nor a simplified prospectus, key investor information document or prospectus as defined in the Swiss Federal Collective Investment Schemes Act. Any benchmarks/indices cited in this document are provided for information purposes only.
The accuracy, completeness or relevance of the information which has been drawn from external sources is not guaranteed although it is drawn from sources reasonably believed to be reliable. Subject to any applicable law, GMG shall not assume any liability in this respect.
Risk Disclosure: This document is of summary nature. The products referred to herein involve numerous risks (including, without limitations, credit risk, market risk, liquidity risk and currency risk). In respect of securities trading, please refer for more information on such risks to the risk disclosure brochure “Risks Involved in Trading Financial Instruments – November 2019”, which is available for free on the following website of the Swiss Bankers’ Association: www.swissbanking.org/en/home.
Material May Be Outdated: This material is produced as of a particular date. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it. GMG is under no obligation to notify you of such changes and you should discuss this material with your GMG relationship manager to ensure such material has not been updated, modified amended and/or supplemented. The market information displayed in this document is based on data at a given moment and may change from time to time. In addition, the views reflected herein may change without notice. No updates to this document are planned. In the event that the reader is unsure as to whether the facts in this document are up to date at the time of their proposed investment, then they should seek independent advice or contact their relationship manager at GMG.
Information Not for Further Dissemination: This document is confidential and should not be reproduced, published, or redistributed without the prior written consent of GMG.