Chronic. The scenario of resilient inflation is not the one that is favored today but if it were to materialize – against a background of rising energy prices and wages – the current strategies of savers and investors could be deeply affected.
The question of inflation is now on everyone’s lips. Is it only transitory, as Jerome Powell, Chairman of the US Federal Reserve (Fed) repeats over and over again, or does it, on the contrary, have some capacity for resilience? The central bankers, who have supported the world economy for several years by influencing the level of interest rates to keep them at an abnormally low level, will they keep this ultra-accommodating policy? Or will they instead opt for a gradual normalization of their action after more than a decade of anti-depression activism?
Since the inflationary peak of 1980 in the developed countries, inflation and interest rates have fallen by forty years until they become familiar from time to time with negative inflation and, in Europe, experience several years during negative rates. unimaginable before.
A transitory phenomenon?
Admittedly, there have been a few periods of price rebound, such as in 2011 or 2018, but they were short-lived. The disinflation of the past forty years has been made possible by fierce wage competition from the emerging world, increased geographic specialization of production, and the effects of technical progress on low-skilled jobs in developed countries.
These factors have prevented wages from engaging with the price of goods and services in the vicious cycle of self-sustaining inflation. Always present, these deflationary forces, combined with the aging of the population and an unprecedented indebtedness of the world economy in times of peace, are the reasons most often cited to convince oneself that current inflation is only transitory.
If the post-Covid reopening of the global economy has fueled the rise in prices against a background of shortages (semiconductors, labor) or disorganization of transport capacities, the anticipated end of these bottlenecks comes reinforce the idea that current inflation is only transitory. So today this scenario is considered the most probable, with some variations as to the duration of the transition.
The two dynamics at work
An alternative scenario does exist, however. Two independent dynamics are indeed at work, which could lead to more resilient inflation.
The first is that of energy and electricity prices. The fast-paced energy transition has reduced investments in fossil fuels, the replacement of which does not appear to be as easy as expected. This amplified the rise in the prices of oil, gas or coal, also due to recent climatic events which reduced their production. A harsh winter could exacerbate and prolong this energy inflation, which would then have repercussions on the entire world economy.
The second dynamic can be seen today in the American labor market. Thanks to social programs put in place during the health crisis, American households have accumulated $ 2 trillion in excess savings, or 11% of GDP.
This allows employees to take their time to best negotiate their return to work and therefore to be in a position of strength in salary negotiations for the first time in more than forty years when companies are in need of manpower. to honor their order book. Wages in the private sector have thus increased overall by 5.5% over the last twelve months, their largest increase since 1982, and the rate of participation in the labor market of the active population is falling while vacancies have fallen. have never been so numerous.
Towards a paradigm shift?
Is it temporary or more durable? The end of social programs, the start of the school year (which frees the parent from custody of the child) and the reduction of the Covid threat in the United States will provide us with the answer in the coming months.
The hypothesis of a lasting inflationary phenomenon is still a gamble with a low probability of success, but it deserves the attention of central bankers, still convinced that the decision to open or close the liquidity valves belongs only to ‘by themselves.
If current inflation were to prove to be resilient, it would again decide the level of interest rates; central bankers would only have to comply. And the time when central banks came to our rescue at the slightest economic downturn would then be over because, contrary to what we have known for so long, inflation would prevent the largesse to which they have accustomed us.
We could therefore see a real paradigm shift. The “Fed watchers”, those people who follow with great attention the communication and decisions of the American Central Bank and who have learned to read between the lines and decipher the unspoken in order to anticipate their actions, would lose their aura of influence. first and then their use because it is inflation in its unvarnished reality that would be imposed on everyone.
The possibility of resilient inflation
And because the likelihood, even low, of this return to basics exists, the possibility of resilient inflation, with all that it implies calling into question for the savers and investors that we are, deserves all our reflection.
How would life insurance contracts in euros behave in a context of rising bond rates? Monetary products like the Livret A or the bank passbooks would they not compete severely with bond investments?
Good growth stocks – those companies that manage to grow their profits independently of the economic growth rate and which often form the bottom of portfolios – could they keep their high valuations? And what about gold or the real estate market? Yes, let’s definitely think about the possibility of resilient inflation even if it still seems illusory to us!