Tabula : Speaking at an event organised by fixed income ETF provider Tabula Investment Management, leading economist Manoj Pradhan predicted that over the next few months inflation will rise higher than many predict, and will stay at this level for some time.
Michael John Lytle CEO of Tabula Investment Management
- Rising inflation will make ‘extracting asset returns harder’
Inflation in the US is currently running at 1.7%, but Pradhan, Head of the Global Economics team at Morgan Stanley and co-founder of the macro-economic consultancy firm Talking Heads, warned it could reach 3% later this year. He commented that rising inflation will make “asset returns harder to extract” and will threaten the independence of central banks, as politicians seek to avoid taking action to control prices.
Pradhan, who recently co-authored a book with Professor Charles Goodhart entitled ‘The Great Demographic Reversal, Ageing Societies, Waning Inequality, and an Inflation Revival,’ said: “Inflation in the US could peak at around 3%, but there is still some complacency it is going to fall, and this risk needs to be challenged.”
Pradhan argues persistently higher inflation is on the way because current fiscal stimulus programmes are going directly into the real economy, in contrast to similar programmes following the global financial crisis which largely went into the financial system.
Pradhan said: “Increased inflation will mean the yield curve steepens and attempts to control it will push inflation even higher, with the result that asset returns will be harder to extract.
Tabula Investment Management CEO MJ Lytle said: “For developed economies, discussing inflation over the last 15 years has been relatively uninteresting, but since last summer that has changed. Indeed, the Bank of England CPI inflation projections for 2024 show a range of forecasts from deflation at -1%, to inflation as high as 5% or 6%.”
At the end of last year, Tabula launched its US Enhanced Inflation UCITS ETF. It is the only ETF in the market that provides exposure to both expected and realised
US inflation in a single ETF. It does this by combining exposure to a US TIPS portfolio with exposure to US inflation expectations (10-year breakevens). It already has US$50 million in assets under management and is attracting growing interest from institutional investors and wealth managers across Europe, as the ETF has been listed across major European exchanges.
Pradhan says globalisation and demography have been the big influences on inflation over the last forty years since the Chinese economy opened up.
“The integration of the Chinese economy is the biggest historic shock to global labour supply we have seen or are ever likely to see,” said Pradhan.
The rise of China and its global workforce meant Western economies with ageing populations could outsource work and benefit from low inflation as cheaper labour produced less expensive goods.”
That lead to a period of low inflation lasting from the 1980s, but Pradhan, believes that is set to end as the benefits of China’s integration start to fade.
Worldwide ageing populations will also mean higher government deficits and borrowing, and fewer workers in general will drive inflation. People in work are generally deflationary as they produce more than they spend, as opposed to retired people who are generally inflationary.
Source : ETFWorld.co.uk