Here are the opposing viewpoints.
1) Last week, Minneapolis Fed President Neel Kashkari said:
"Once we get inflation down, we can get back to the pre-pandemic economy with low inflation, low unemployment and decent wage growth"
2) Today, JP Morgan's Karen Ward, chief market strategist for EMEA, is saying
"The world of low inflation, zero interest rates is thoroughly behind us — that's the biggest thing investors have to get their head around."
The answer to that question is the biggest one facing investors this decade. Was it a one-off inflationary impulse due to reckless policy from central banks and governments? Or has a genie been let out of the bottle that will exacerbate demographics problems due to aging and the loss of the disinflationary dividend from China?
I think it's too early to make a call and it's a tough one. Governments continue to spend and I don't see higher bond yields yet imposing fiscal discipline. But central banks sound determined and I take them at their word that they will stick to high rates to crush inflation. When Kashkari talked about a return to the low-interest rate world, there's a sense of longing there and it's a paradigm that's much easier to navigate then the current inflationary fiasco.
Finally, there's technology, which is a big part of the reason that we had deflation from the late 1990s until the pandemic. Technological innovation appeared to fizzling as a source of disinflation until the explosion of generative artificial intelligence in the past six months. That's likely to be a game-changer and result in a much more productive labor force with fewer employees.
So while I think the lack of investment in raw materials will be a source of inflation in the years ahead and there will continue to be wage pressure, the larger arc is going to be back towards disinflation and low interest rates again. It's tough to make those investments right now with a huge amount of conviction but that's the way I'm leaning.
