Global Macro Research
Global Macro ResearchHas the global economy entered a structurally more volatile inflation regime?
Whatever the near-term path of inflation, increasingly frequent negative supply shocks mean the global economy has likely entered a new regime of structurally higher inflation volatility. This would likely push up risk premia and challenge standard portfolio diversification strategies.
Authors
Paul Diggle
Chief Economist
Luke Bartholomew
Deputy Chief Economist
Mark Bell
Graduate Business Analyst, Global Macro Research
Duration: 1 min
Date: 11 Apr 2024
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
increased.
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.
