Key Takeaways

  • We think the longer-term inflation regime will be one of

    structurally higher inflation volatility, and central banks

    more frequently needing to bring inflation back to

    target from above rather than below.

  • This is because, in contrast to the period from 1990 to

    the start of the pandemic, the global economy is more

    likely to be hit by negative supply-side shocks. These

    push growth down and inflation up, creating a difficult

    trade-off for policymakers.

  • In particular, the geopolitical environment is becoming

    more challenging, aspects of globalisation are heading

    into reverse, climate change may put upwards

    pressure on food and energy prices, and scientific

    consensus suggests future pandemic risks have


  • Moreover, greater political interference, the large

    increase in government debt, and a growing focus on

    central banks’ ESG goals, may hinder central banks’

    ability to focus on price stability.

  • Higher inflation volatility may push up discount rates,

    as investors require higher expected returns to

    compensate for more uncertainty about the future.

  • Supply shocks – even positive ones of the sort that

    may come from AI – tend to be associated with a

    positive bond/equity correlation, making portfolio

    diversification more challenging.


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