Inflation—Joining the Dots: Shifting Priorities Open the Door to Higher Inflation

What You Need to Know

As the world starts to recover from the COVID-19 pandemic, a range of factors are converging to create a new inflationary era. Crucially, the policy regime is changing, driven by the need to respond to emerging social and environmental challenges and help manage record peacetime debt levels. These developments reinforce longer-term structural changes that are ending the long period of disinflation that the developed world enjoyed from 1980 to 2020. Such secular trends include the reversal of positive demographics and the start of de-globalization. How did we get to this juncture? What can we learn from previous inflationary episodes? And what are the chances of a different outcome this time?

The average rate of UK Inflation
since 1700 under the gold standard
The average rate of UK Inflation
since 1700 under fiat, or paper, money regimes
14 cents
The real value of a US Dollar in 100 years’ time
if inflation averages 2.0% a year, defined by some central banks as price stability


Inflation is back. The most obvious example is US core inflation, which is rising at its fastest pace since 1992—close to when the inflation-targeting era began. Much of the upward pressure on prices reflects demand distortions and supply dislocations associated with COVID-19 and will probably fade with time. Even so, there are signs that inflation may be waking from its long slumber and beginning to shift to a new, higher regime. Markets are currently focusing on supply chains and pent-up household savings. These factors will help shape the near-term outlook and the extent to which upward pressure on prices is transitory. But they won’t tell us much about the longer-term outlook for inflation. Nor will the Phillips curve—the economics profession’s favorite tool for thinking about inflation—for reasons we discuss below.

Where, then, should we look to join together the dots of information to get a picture of inflation in the years ahead? Structural factors—like demographics, technological progress and populism— should not be ignored when thinking about the longer-term outlook for prices. But our analysis suggests that the policy regime itself is decisive for inflation over longer horizons. And there are more and more signs that this is changing, driven by the response to rising populism, record debt levels and an ever-expanding list of policy priorities. To twist Milton Friedman’s famous dictum: inflation is always and everywhere a political choice.

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Past performance, historical and current analyses, and expectations do not guarantee future results. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.

About the Authors

Darren Williams oversees the Global Economic Research Group for Fixed Income. He is also responsible for economic analysis, interest-rate forecasting and bond market strategy for Western Europe. Williams has covered the major economies of Western Europe for almost 30 years, and has written extensively on the European Economic and Monetary Union and the monetary policy decision-making process of Europe's central banks. This experience proved invaluable when it came to guiding AB and its clients through the European sovereign-debt crisis in 2010. Williams joined the firm in 2003 from Citigroup, where his main focus was on providing thematic research to equity investors. Prior to that, he helped establish global economics coverage at Donaldson, Lufkin & Jenrette. Earlier in his career, Williams held senior positions at UBS, where he was responsible for pan-European coverage and coordinating a team of economists based in Europe, and Merrill Lynch, where he was responsible for economic analysis and bond market strategy for France, Italy and Spain. He holds a BSc in banking and finance from Loughborough University (UK). Location: London
Guy Bruten is a Senior Vice President and Chief Asia-Pacific Economist for AB's Global Economic Research team. In that role, he provides macro research coverage for a number of countries in the region, and is also responsible for conducting thematic research-looking at the impact, for example, of demographic change, the commodity price supercycle and the global surge in populist politics on the outlook for economies and asset prices. Prior to joining AB in 2004, Bruten worked in economics and market strategy roles for Macquarie Bank's Funds Management Group and for SBC Warburg. He started his career in the early 1990s at the Commonwealth Department of the Treasury in Canberra. Bruten holds a BEc from the University of Adelaide and an MEc from the Australian National University. Location: Melbourne

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