A top investor in the world’s largest hedge fund has warned that high inflation will remain here and that central banks may be powerless to fight it without hindering economic recovery, a week after fuel prices rose in markets around the world.
Bob Prince, co-chief investment officer at Bridgewater Associates, said the Federal Reserve’s claim that the current burst of inflation would prove to be short-lived could be challenged. As the global economy revives from the epidemic lockdown, they are emerging from a resource deficit under high pressure, he said, adding that price pressures will be difficult to fix.
“If there’s inflation, the Fed is in a box because it won’t do anything to strictly reduce inflation unless they do a lot, because it’s supply-driven. And if they do a lot of it, it lowers the financial markets, which they probably want to do. No, ”he told the Financial Times.
“Deciding between the two bad ones, what would you choose? I think you’ll probably choose inflation because you can’t do much about it.
Prince’s remarks echoed inflationary concerns in the market this week, as intense competition for natural gas supplies pushed up fuel rocket prices, raised concerns about broader price increases and raised concerns about the price of inflation-sensitive bonds. U.S. Treasury yields, which rose as prices fell, rose to a four-month high of 1.60 percent on Friday as market-based measures of inflation expectations reached their highest level since May.
Movements were more intense in Europe, where the gas crisis was more intense. Ten-year inflation breaks in Germany – the measure of investors’ inflation expectations for the next decade – has risen to a record 1.68 percent since 2013, which has not been seen since May. In the UK, where the Bank of England has said it may raise interest rates as early as this year in an effort to control inflation, 10-year breakeven highs are the highest since 200 and Friday gilt yields rose 1.1 per cent, the highest since May 2011.
Prince described the BoE’s rate warning last month as a “wake-up call” for investors. However, he suggested that central banks also need to adapt to their limited fighting power.
“We are in a situation where you still have this inertia from demand, it is pushing against limited supply and it has pushed up inflation,” he said. “And while the sensation is low that it will be very fleeting and just come back, we don’t think so, because there’s a lot of inertia going on from this cost and these supply constraints won’t be so easy to solve, especially since Covid is a problem.”
The comments represent a glimpse of Prince’s outlook in June, when he compared the current and 1970’s “great inflation”.
This week, he said, “it starts to look a bit like the 70s and the oil pushes.” He explained that in the 1970s, oil prices rose due to declining OPEC supplies, which further increased inflation. That dynamism brought the economy down while it also pushed up inflation. “Raising interest rates will not increase the supply of oil.”
Despite the recent bond sales, and the pullback in stocks last month, many investors are adamant in their view that a large portion of the current price rise will prove temporary and central bankers will hold their nerves until they become more compelling evidence of greater demand-induced inflation.
“The central bank should respond to inflationary pressures,” said Gurpreet Gill, a fixed-income strategist at Goldman Sachs Asset Management. “Today they are in isolated areas. Will not come
Others argue that stagnation – a combination of rapid price growth and slow growth – has kept bond markets in check. Luca Paulini, chief strategist at Picket Asset Management, argues that a steep rise in the cost of living could increase rapidly and even increase the risk of a recession. In that environment, the central bank can be expected to keep rates low অথবা or any premature increase-would make long-term government bonds more attractive and stop selling.
“Inflation is like a tax that kills demand,” Paolini said. “In a sense if it gets too bad, it kills itself – but that’s not a positive view.”