Degroof Petercam: Das Comeback der Inflation

The main article focuses on whether the reflation trade is for real. Indeed, following higher inflation readings across Europe, the question is whether inflation is here to stay. Hans Bevers and Yves Ceelen look into this matter both from a macro-economic as well as from a portfolio management point of view. After all, it is important that investors integrate this new reality in their portfolio construction.

Secondly, we investigate the outlook and investment case for listed European real estate, an asset class for which Degroof Petercam AssetManagement (DPAM) has built significant expertise over the past two decades. Following several years of good performance for this asset class, we can imagine investors would like to know what’s in store for, let’s say, the next two years. Senior Portfolio Managers Olivier Hertoghe, Damien Marichal and Vincent Bruyère aim to shed some light onto this.

Last but not least, Ophélie Mortier, Responsible Investment Strategist, aims to provide an objective view on President Trump’s climate change policies. There is not a lot of clarity about this matter, to say the least. However, climate change remains a long-term challenge. The fast ratification of the Paris Agreement proves just how seriously countries take the climate change problem.

How strong a comeback for inflation?

It’s back: following earlier fears of deflation, inflation is making headlines again. Most countries are witnessing higher headline inflation against the backdrop of base effects linked to energy prices. Underlying inflationary pressures, however, remain modest for the timebeing. In theory, the improving growth momentum in place since the summer of 2016 should translate into a gradual and more sustainable rise in price levels. Nevertheless,there are differences between regions and various risks, both upward and downward, continue to be very present.

How inflation has been a key concern for Western policymakers ever since the start of the Great Recession. Despite near-record-low interest rates and unprecedented balance sheet expansion,most central banks are in fact still waiting for higher inflation to materialise before departing from their extremely loose monetary policy strategies.

Types of inflation
In essence, we can distinguish between three types of inflation: (1) cost-push inflation, (2) demand-pull inflation, (3) monetary inflation. The first one, cost-push inflation, is mostly the result  of higher commodity prices or accelerated wage growth. Inflation is pushed higher by the increase in the price of production inputs, even when  demand remains stable. Examples include the negative oil-supply shocks and the subsequent wage-price spiral in the 1970s, a period characterised by stagflation. The second one, demand-pull inflation, is driven by stronger demand for goods and services among consumers and investors. Prices increase as more money chases after a limited available amount of products. The above target-inflation rates witnessed during the boom in several Southern European economies prior to the Great Recession, for example, fall into this category. Finally, the monetary theory of inflation holds that an increasing money supply leads to higher inflation in the long run. The concept is mostly associated with Milton Friedman, who said that “inflation is always and everywhere a monetary phenomenon”. According to this view, inflation has little to do with things like production costs or consumer demand, but everything to do with the money supply.

Currently, despite relatively low commodity prices in general, base effects are pushing headline inflation higher. The situation is attributable to the fact that the earlier sharp drop in energy and metal prices disappears when one looks at the year-on-year comparison. This type of cost-push inflation is illustrated in the graph above. A mere stabilisation of the oil price at current levels implies that the strong reflationary effect currently in place will fade over the remainder of 2017.

The headline inflation rate, however, is very vulnerable to sudden changes in commodity prices and it is why a closer look at underlying  inflationary pressures, stripping out the more volatile elements of food and energy, is more appropriate. On this level, the very tepid growth environment following the 2008-2009 recession, combined with the presence of slack in most economic sectors, has resulted in very subdued price increases over the past eight years. Core inflation in the Eurozone, for example, still hovers around 1%, firmly below the ECB’s 2% inflation  arget. The US, on the other hand, has made far more progress in this respect, but underlying price pressures have been building only very  gradually and they remain modest up to now.

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