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Inflationary pressures have been stronger and longer lasting, as we have been going through both the pandemic crisis, and the post-crisis adjustments. These inflationary pressures have been amplified this year by the Russian invasion of Ukraine, China’s zero tolerance policy on Covid, and US dollar strength.
In this article, we focus on inflationary pressures, specifically the importance of wage inflation, and its potential impact on monetary policies, and in turn equity markets. In our view, while inflation will be stronger and longer lasting, it remains frictional, rather than structural.
A focus on wage inflation is critical to assess the risk of inflation turning structural:
- Frictional inflation is related to the post-pandemic crisis effects – it has been exacerbated this year by the dual supply shocks of the Ukraine invasion and China’s zero Covid policy
- Wage inflation trends remain subdued in most key geographies, apart from the US, where it is accelerating rapidly. This carries risk of frictional inflation becoming structural, bringing the risk of an inflation feedback loop, and making inflationary trends more sticky
- All eyes should be on wage inflation as an important determinant of future inflationary pressures – therefore impacting monetary policy expectations, and the direction of risky assets, notably equities, as well as determining equity style leadership between Growth and Value
So, for the time being, for investors to call direction of equity markets, it is all eyes on inflation; and as we flag above, given that wage inflation is an important determinant of inflation in the mid-term, it is all eyes on wage inflation
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Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
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