Investors should not make automatic assumptions on inflation
The current inflation and the recent oil price shock do not necessarily mean that stagflation will be the next step because despite constant parallels to the Great Inflation of the 1970s, there are key differences, according to Insync Funds Management.
Insyc’s chief investment officer, Monik Kotecha, said inflation levels in the 70s were much higher and for a much longer period of time before extraordinarily high levels hit.
Following this, the 70s was a period of much greater global unionisation of the labour force and the information available to central banks and governments today was superior to the information available to them in the 70s.
Kotecha stressed that inflation was already running at about 4% per annum in the 70s, ahead of the oil price shock.
“That flowed into much higher wages. Higher wages mean inflation can be absorbed because people spend more. But greater spending only pushes inflation and wages even higher, and so it becomes a spiral. We didn’t have that kind of scenario coming into this year,” he said.
However, the unions who were then able to achieve those significant wage increases did not have the same level of unionised power in the workforce today.
Kotecha also said the current oil price spike had been driven principally by what’s happening with Russia and Ukraine, with most producers not increasing supply as they were concerned about a slowing economic situation down the road reducing oil demand.
“The other big difference today is that while we are still reliant on oil for a lot of products and services, and it is having an impact, global GDP now is a lot less reliant on oil than it was in the 70s,” he added.
Kotecha was not predicting that inflation was going to suddenly go down to previous abnormally low levels, but at the same time investors shouldn’t automatically assume it would be only going up.
“Don’t build portfolios based on a belief that we’re now in a stagflation environment because it’s far too early to make that call yet. And if you do that, you’re at risk of over-exposing your portfolio.”
In focussing on the short term, Kotecha said investors were missing what’s happening longer term.