“Inflation is like chewing gum. It’s sticky and flexible, and you definitely don’t want to step in it.” Capital Group
For the past 30 years, investors haven’t had to worry much about dealing with inflation, says Capital Group fixed income portfolio manager Ritchie Tuazon. That changed last summer when COVID-related distortions and excessive government stimulus caused prices for energy and most consumer goods to skyrocket.
Today, the biggest questions for long term investors are how high will inflation go and how long will it last?
Adding to the uncertainty is that there are two types of inflation, according to Tuazon:
- Sticky inflation tends to have longer staying power. Sticky categories include rent, insurance and medical expenses.
- Flexible inflation — affecting items such as food, energy and cars — has risen much faster in recent months but many believe it won’t last.
From Capital Group’s perspective, they expect high inflation might persist longer than expected and should move closer to its 2% historic goal by sometime in 2023.
Higher inflation levels should remain elevated through late 2022, fueled by labor shortages and broken supply chains. “Consumer prices will eventually return to normal, but that process may take longer than Fed officials are expecting,” says Tuazon.
The Fed is left to react to inflation, but not overreact. Start, but not go too fast. Tighten, but not in the “wrong” ways.
Regarding inflation impact, “the first question is whether inflation will cool off enough on its own to not threaten corporate earnings growth or hurt consumer spending”, states Liz Young, Head of SoFi Investment Strategy. “The second question is less about whether the Fed can control inflation expectations with policy moves and more about whether the market is going to think they’re making a mistake and create a self-fulfilling prophecy.”
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