An Inflation Regime

By Jeroen Blokland,
Published on July 14, 2023

In the fourth episode of Inflation and Investing, I will look at potential structural changes in the long-term inflation outlook. In the first episode, I showed that before 1950, the annual inflation numbers were pretty erratic. Years of high inflation were followed by low or even negative inflation.

The most frequently used explanation for more stable inflation is, of course, the rise of central banks. But it is not that likely that monetary policy explains all of the behavior of inflation over the past decades. For example, the Federal Reserve was founded in 1913, but it took until 1994 before discussions of an explicit inflation target popped up and until 2012 before an actual target was formalized under Ben Bernanke.

Jeroen Blokland, founder of True Insights - offering independent investment research and portfolios enabling investors to implement a comprehensive and proven multi-asset investment approach.

I distinguish six separate factors that help explain the path of inflation.
  • Monetary policy. While it is unlikely that the central banks are the sole force driving inflation, we should not underestimate its impact. A key aspect is the so-called transmission mechanism. How much of the intended policy of central banks makes it to the real economy?
  • Demographics. The working-age population, in particular. A declining working-age population means lower potential GDP growth and lower inflation.
  • Globalization. Global trade, global supply chains, geopolitics, and cross-border movement of capital and labor, are just a few examples attributed to globalization. Keep in mind; globalization has increased after every major war in history.
  • Technology. Technology is everywhere and has few or no boundaries. Equally important, technology tends to get cheaper all the time. Hence, so are the goods and services associated with it.
  • War. Inflation tends to go up during and after wars.
  • (Bad) luck. The behavior of inflation pre-1950 reveals that we don’t know everything about inflation. Hence, this means that luck, or more formally, exogenic shocks, also impact price changes.
Is this time different?

Making a substantiated claim that inflation will look different from the last 40 years implies that at least one of the factors driving inflation should also be different. I think there are two out of the six main inflation-driving factors that likely will look different in the future:
  • 1. Monetary policy
  • 2. Globalization
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Jeroen Blokland

Hi, I'm Jeroen Blokland and I've been what they call a multi-asset investor for a long time. After working for Robeco, one of the largest investors in the Netherlands, for more than 20 years, I founded my own company: True Insights

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