March 5, 2021

Alfonso García Yubero: Herd inflation


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When I was a kid, I loved to read fables, and one of my favorites was “The Lying Shepherd” by Aesop. I liked it so much that, not being satisfied with just reading it, I also enjoyed listening to it with my sister on an audio-story tape played by our Philips radio cassette player. Surely the reader will know this story and its moral.

We just started the year and one of the “wolves” that threatens to appear in the “mountains” of the economy is inflation. And this time, as in Aesop’s fable, he would catch the unsuspecting and unsuspecting “shepherds” or economic agents. And it is that that of “the wolf is coming” has been exclaimed by many doomsayers in the matter, without an iota of inflation’s “ears” having appeared since March 2009, a historic moment in which the US Federal Reserve .UU. Rolled out its first quantitative expansion program. Like transhumance, it is a continually moving debate.

In addition to the “hype” of many economists, there are additional reasons why economic operators have lowered their guard in recent years and no longer come to the demand for warnings on higher prices. It is largely logical that this is the case, when, for example, during the 1970s, the greatest concern that according to Americans faced their country was inflation (now it does not appear on the list), when the growth of Prices during that same decade averaged 10% per year in OECD economies (in the last one it has remained below 2%), or when, anecdotally (or not so much), on the agenda of a major conference of Central bankers to be held next February in Germany will dedicate a lot of space to issues such as financial instability, inequality or climate change, but hardly anything for inflation.

Once the debate has been reopened with the first steps of 2021, it is convenient to try to answer three questions that almost every economist and investor keeps in their “bag”. The first is, Will there be a rise in prices in the next twelve months? A moderate rebound is foreseeable, and not just because a recent Bank of England study, based on 800-year records, has concluded that inflation tends to rise in the year after a pandemic starts. The fact is that, among other factors, central banks are beginning to prefer to sacrifice control over the inflation variable in favor of propping up the recovery of economic growth.

Also a little inflation would be welcome to aid in the debt sustainability process, easing the real burden of leverage. In addition, at the moment in which the consumer demand repressed by the confinements of varying degrees, success of the vaccines through, is released, there would be unavoidable price tensions while the production supply, logically cautious when uncertainty persists, does not accompany the longed-for renewed consumer momentum. Last but not least, this time the generous deployment of liquidity that central banks have made has, as it did not happen after the great financial crisis of 2008, translate into substantial growth in broad monetary aggregates on both sides of the world. Atlantic, which, according to the monetarists of the Chicago School, would end up having a decisive and bullish influence on the price level in the long term.

The second question is if an eventual rise in prices would reach worrying levels as those recorded in many moments of the last three decades of the 20th century. There are reassuring arguments to avoid this, such as the levels of idle capacity that are still appreciable in advanced economies, the weakness of the wage variable, or the substantial productivity gains that would begin to crystallize in the global economy once the adaptation threshold has been crossed. between seven and ten years, since a technological leap like the one we are experiencing begins.

By last, Should investment portfolios be protected against this threat? It would not be necessary to reduce risk positions (stock market), but it would be necessary to incorporate assets such as gold, industrial metals, real estate or infrastructure, which are closely correlated with inflation, into a portfolio. In other words, don’t shear your sheep, but adopt a good sheepdog.

Alfonso García Yubero is Director of Strategy Santander Private Banking

Alfonso García YuberoAlfonso García Yubero

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