Inflation is as corrosive to investing as it is to the real economy
It is more than two years since high inflation returned to the rich world, and hopes that it will quietly fade are themselves fading. True, prices are rising more slowly than in 2022, when the pace hit 9.1% in America, 10.6% in the euro area and 10.4% globally. But the view that this was just a passing lurch looks ever less plausible.
Britain’s rate has been stuck at 8.7% for two months. American “core" prices, which exclude volatile food and energy, are 5.3% higher than a year ago, a rate that has barely fallen for the past six months. If inflation continues to fester, the effects will quickly be felt in financial markets.
Sustained price rises do not affect all asset classes equally, so a relative repricing will be required. But those one-off profits and losses will not be the only consequence. In the real economy, inflation corrodes trust by continually and arbitrarily redistributing wealth.
In the financial one this corrosive dynamic is less obvious, but just as real. Central bankers remain adamant that they will return inflation to their targets, typically 2%. Many on Wall Street, though, are sceptical.
Jean Boivin, who runs the research arm of BlackRock, the world’s biggest asset manager, makes his argument bluntly. “Central banks can always bring inflation back to 2% if they really want to, but now it would require too big of a demand crush to bear." He believes it will instead settle around 3-4%. Richard Clarida, vice-chair of the Federal Reserve from 2018 to 2022, has a similar view.
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