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Inflation: Transitory or troublesome?

December 16, 2021
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Of all the fears investors have faced over the past 30 years, high inflation wasn’t among them. In 2021, that’s changed.

Today, the biggest questions for investors revolve around inflation: How high will it go and how long will it last? Is it “transitory” as the Federal Reserve claims? Or is elevated inflation the new normal amid labor shortages, supply chain bottlenecks and a severe energy crunch?

The uncertain path of the pandemic makes near-term conditions difficult to predict but, over the long term, the picture comes into better focus, says Pramod Atluri, principal investment officer of The Bond Fund of America®.

“While we are facing a cyclical rise in inflation and interest rates today, when I look out five years, I think U.S. economic growth will be slower and inflation may be lower,” Atluri says. Economic growth should slow due to high debt levels and fading stimulus, resulting in a return to GDP gains of 1.5% to 2.5% a year. Consequently, interest rates should stay relatively low as well.

“In the meantime, we are laser focused on inflation because that’s the biggest risk to investors’ portfolios over the near term,” Atluri explains. “If we are wrong about inflation, we will be wrong on the upside, so it makes sense to protect against that outcome.”

 

A tale of two inflations: Sticky versus flexible

The image shows sticky and flexible price inflation over the past 54 years. Sticky and flexible prices reflect the Atlanta Federal Reserve sticky and flexible consumer price indexes (CPI). If price changes for a particular CPI component occur less than every 4.3 months, that component is a “sticky-price” good. Goods that change prices more frequently than this are “flexible-price” goods. Sources: Federal Reserve Bank of Atlanta; Refinitive Datastream. As of August 2021.

Sources: Federal Reserve Bank of Atlanta; Refinitive Datastream. Sticky and flexible prices reflect the Atlanta Federal Reserve sticky and flexible consumer price indexes (CPI). If price changes for a particular CPI component occur less than every 4.3 months, that component is a “sticky-price” good. Goods that change prices more frequently are “flexible-price” goods. As of August 2021.

 

Two flavors of inflation: Sticky and flexible

A source of uncertainty today is that there are two different types of inflation: sticky and flexible... READ MORE

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Read this article and other Captial Ideas at American Funds.