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Why inflation worries may be overstated

Inflation fears spooked investors earlier this year and continue to weigh on their minds as resurgent economic activity pushes up prices, yet evidence suggests the inflation pick-up is transitory.
Why inflation worries may be overstated

After the collapse of inflation rates during the 2020 pandemic shock, it is unsurprising that prices of general goods and services are bouncing back this year. Commodity prices were particularly affected as the lockdown led to dramatic oversupply, followed by a resurgence in demand as economies reopened.

The pandemic has also disrupted supply chains due to delays in logistics, causing shortages in goods and thus inflation pressures. However, these pressures are expected to abate as the world gradually returns to a more predictable and balanced economic equilibrium.

Andrew Mulliner

“Commodity prices affect headline inflation. But unless commodity prices increase persistently, the tailwinds for inflation will become headwinds by next year,” said Andrew Mulliner, head of global aggregate investments at Janus Henderson Investors.

Take oil as an example, after hitting its low of around $20 in April 2020, oil prices broke above $75 a barrel to a near three-year-high in early July 2021 but are now coming off the peaks.

“It is hard to imagine inflation accelerating if economic growth slows. A key factor determining global growth is China. We see a softening of credit growth represented by the China Credit Impulse, which, as history suggests, could act as a headwind for commodity prices,” Mulliner said.

“Past reflationary episodes in 2012 and 2016 coincided with strong credit growth in China. However, the China Credit Impulse peaked in late 2020,” he said.

CRB Raw Industrials Index and China Credit Impulse, YoY % change

(Source: Janus Henderson Investors, Bloomberg, CRB = Commodities Research Bureau, 31 March 2011 to 30 June 2021)


Investors globally are wary of inflation in the US, but careful analysis suggests the increase in prices should be temporary.

The increase in price levels in the US has recently been dominated by big changes in airfares and used car prices. But the price rise in used cars is largely due to supply disruptions of new cars, or so-called relative price shifts, indicating that it is unlikely to add to persistent inflation. 

When looking at core inflation (which excludes volatile items such as food and energy costs) or the median measures or trimmed mean (which removes the impact of large statistical outliers), consumer prices are rising, but they are still within the range of the last decade.

Alternative measures of inflationary pressure

(Source: Bloomberg, 30 June 2008 to 30 June 2021)

“Price increases can become persistent if met by higher wages, but there is little indication of a continuing surge in wages,” Mulliner said.

“So far, labour has not gained much pricing power. Unionisation remains low compared to the 1970s when wages and prices rose at the same time. People are encouraged to return to the labour force as labour market interventions, such as furlough schemes, have subsided. As a result, wage pressure could be reduced in the coming quarters,” he said.

Another factor is the excess savings accumulated during the pandemic. The savings have been mostly racked up by wealthier households and invested into financial assets such as equities or housing. This is generating asset price inflation, with minimal impact on wage inflation, he explained.


For the first time since the 2007-2008 global financial crisis, monetary policy and fiscal policy are both expansionary, which could result in inflation if the supply side does not keep up the pace.

But the debt created during the pandemic was used to support current consumption, which could act as a restraint on future growth. Moreover, the fiscal policy thrust could turn into a headwind for inflation as governments are unlikely to spend more than they did last year.

The increase in money supply has been geared towards the government sector to fund emergency schemes, while many individuals have used stimulus payments to reduce debt or lessen their appetite for borrowing.

This means growth in broad money supply is slowing, and bank lending (demand for credit) has dropped to levels last seen in 2011. Recent data shows that US banks’ excess liquidity is being put to work in securities markets and not being lent to the real economy.

“While we remain cognisant of the variable lags of monetary policy that may result in inflation pressures being deferred rather than destroyed, it is not yet showing up in these key indicators,” Mulliner said.

“Overall, the evidence suggests that while the pick-up in consumer prices will be significant, it is cyclical in nature and expected to peak in the coming quarters,” he said.

Learn more about Janus Henderson’s unique fixed income insights here.


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