Could this provide a ‘Goldilocks’ scenario?
Economic commentators and central bankers seem at last to be taking inflation risk seriously, rather than assume that current inflationary pressures constitute a short-term phenomena as the global economy bounces back from the deep Covid-linked recession. But as with the Nixon/Johnson era of the 1960s, post the Vietnam war, once inflation takes hold and input shortages feed through into price rises and wage inflation, unless central banks tighten early, inflationary spirals can gain momentum. A debt-fuelled binge of public and private sector spending and tight supply of key materials combine into the perfect inflation storm and, to date, central bank pronouncements have suggested that policy is to become less accommodating, but not for some time yet.
History suggests that it will take ferocious monetary tightening to bring prices back under control
Many commentators trust the Federal Reserve to have learned the lessons of history and not bend to political pressures, but all bets should not be on this outcome. The danger that corrective action will be too little, too late, makes it increasingly likely that the inflation genie, once out of the bottle, will be difficult and painful to put back. Sanguine forecasts of a temporary uptick in global inflation to low single digits necessitating a mere nudge to the fiscal and monetary tillers will in all likelihood prove optimistic. If so, history suggests that it will take ferocious monetary tightening to bring prices back under control. Or will it?
We already have indication from central bankers that inflation targets are to be relaxed – this is hardly surprising given the potential increased pricing of treasuries required to fuel and service massive increases in government borrowing. So could this be a ‘Goldilocks’ scenario for property investors as governments inflate their way out of debt?
In previous cycles, inflation-linked rent increases that feed through to income growth have been tempered by increased yields in anticipation of rising finance costs and the knock-on effects on long-term debt valuation. Perhaps this time there will be at least a period when no such brake is applied to values – but keep an eye out for a steepening treasury yield curve!
