Some investors believe that the era of cheap debt is over amid the inflationary shock

Some of the world’s largest bond investors say the market is wrong in expecting central banks to achieve a long-term victory in the fight against inflation.

There is little doubt that rate hikes by policymakers in the US and Europe, such as Federal Reserve Chair Jerome Powell, will drag consumer price increases down from the fastest pace in decades by slowing economic growth or triggering recessions.

But the fall in inflation from its peak is unlikely to mean a return to the price stability of the recent past due to sharp changes in the global economy, according to a broad group of investors and strategists from firms including Pacific Investment Management, Capital Group and Union Investment.

During the era of increased globalization, cheap raw materials and low labor costs helped keep inflation in check. Now that is beginning to reverse.

Oil and gas prices soar as nations cut ties with Russia over Ukraine war. Businesses weigh political tensions as they rebuild frayed supply chains. And tight labor markets give workers the opportunity to push for higher wages.

That has money managers monitoring trillions of dollars in preparation for inflation staying well above the roughly 2 percent level targeted by major central banks. To protect against this risk, they have bought inflation-linked bonds, increased exposure to commodities and cash holdings rather than investing directly in bonds, and bet that consumer price increases will not return to the levels of recent decades anytime soon .

“The last 20 years of great moderation — that’s completely behind us now,” said Tiffany Wilding, North American economist at Pimco, which had about $1.8 trillion under management at the end of June. She anticipates a period of very volatile inflation as the world adjusts to changes that “will generally result in higher input costs that should lead to a multi-year adjustment in price levels.”

The views contrast with speculation that price pressures will ease enough that the Federal Reserve could start cutting interest rates next year to boost economic growth.

Benchmark 10-year government bond yields are around 3 percent, about half a percentage point below their mid-June high. And a proxy for US inflation expectations for the next two years has been nearly halved since March to about 2.7 percent, not too much above the 1.9 percent average increase across a broad price scale in the 20 years before the pandemic.

Both policymakers and markets were surprised at how stubborn inflation has been, initially seen as a temporary side effect of the pandemic that would subside once economies reopened.

The UK reported that consumer prices rose faster-than-expected by 10.1 percent in July, the highest since 1982, sparking a sharp rise in yields as traders dumped two-year bonds. Some investors believe that the era of cheap debt is over amid the inflationary shock

Fry Electronics Team

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