Inflation: Growth Calls the Tune

Written by: Global Thought Leadership | February 09, 2018

Source: Bloomberg, Bureau of Economic Analysis, Federal Reserve, Feb 9, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line

  • With markets suddenly volatile after years of calm, it’s easy to be distracted from the basics that drive prices long-term – like inflation.
  • One key question now: Is inflation being driven by the threat of unsustainable wage growth. or are there more positive forces at work?
  • Since the Great Recession of 2008-9, one key worry has been the sluggishness of corporations’ investment in productive capacity, which traditionally sets the stage for future growth.
  • In the years immediately following the 2008-9 slowdown, companies made up for the pause in growth by rebuilding capacity. That boost showed up in inflation expectations – the most common measure, the 5-year breakeven rate, stayed between 2.5% and 3.5% until the latter part of 2015.
  • As investment slowed down, inflation expectations fell as well – staying below the Fed’s medium-term 2% target rate.
  • But as optimism, tax reform and expectations of a pickup in government spending all grew, investment picked up as well. Eventually, inflation expectations rose as well – with 5-year inflation expectations moving past 2 years in mid-January.
  • Only time will tell whether the boost in investment will continue in the face of the currently unsettled financial markets.
  • But it’s important to keep in mind that one of the underlying drivers of the pickup in inflation is in fact a positive for economic growth in the medium to long term
  • It takes a fundamentals-based, active management approach to look past market volatility to focus on underlying economic trends, and to potentially put those trends to work on behalf of investors.



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