FOR or all the recent headlines about rising costs, oil prices and interest rates, there’s little to suggest inflation is anything other than under central bank control, argues Pendal’s Oliver Ge.
US inflation numbers came in higher than expected for August, marking the first acceleration in price rises since February.
The data sparked a number of news reports extrapolating the monthly figures to warn of a second wave of inflation and a new round of interest rate rises.
But a closer look reveals that the global economy is a long way from the narrative the news media are pushing, says Ge, a portfolio manager with Pendal’s Income and Fixed Interest team.
“This kind of stuff is going to get a lot of clicks.
“Thirteen consecutive months of disinflation in the US and now we’ve had the first tick up, and somehow the media is extrapolating that the Federal Reserve is on the case and it’s all going to end in the crapper.”
Ignoring noise created by business media is an important lesson for investors, says Ge.
“There’s a lot of commentary on a possible ’70s-style, second wave of inflation. And how if that were to happen, central banks would need to react.
“But I don’t believe we’re going down that path. We’re not even close to a rerun of the 70s.”
The dual inflation shocks of the 70s and 80s have gone down in investing folklore as a tumultuous period of skyrocketing prices, spiralling wage rises and damaging unemployment.
“Some people are concluding that we’re on the path to repeat the 70s/80s experience when inflation hit almost 15 per cent in the US.
“But there are a few reasons why we’re not likely to get a re-run of what happened 50 years ago.”
Ge says the 70s crisis was unique and brought about in part because the US economy was running very hot.
“In 1973, the US economy was growing at 7.6 per cent — three times higher than what it is today.
“It also had a highly unionised labour force. And then it got whacked with two major oil shocks.
“The difference is that back then, the US was highly oil dependent, and it also was experiencing a massive devaluation of its currency. Put the two together and it triggered a big wave of inflation.
“At the same time, the US was home to a sizeable manufacturing sector, which was very highly unionised. They had explicit mandates in contracts that matched pay to inflation.”
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But he says the environment today is very different.
“The US is no longer energy dependent — in fact it is an exporter of oil. Unionisation is no longer widespread. There are none of the original catalysts that prompted the blowout.”
The central banks also play a different role today, says Ge.
“Central banks today have a very explicit inflation fighting objective — they are not going to suddenly drop rates because inflation is coming down like they did in the 70s.
“They will choose to err on the side of caution. That means we’re going to see an environment where rates are going to be higher for longer.
“The picture I’m painting isn’t sexy — but it’s real. And it should comfort investors.”
Oliver Ge is an assistant portfolio manager with Pendal’s Income and Fixed Interest (IFI) team.
Oliver works on developing and running key quantitative investment models, and acting as trading support for the team. Oliver received his Bachelor of Commerce (Finance) from the University of Sydney and is also a CFA Charterholder.
Pendal’s IFI boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
The invests across income, composite, pure alpha, global and Australian government strategies.
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