Why is inflation part of a “new” normal?
Mário Pires | Schroders
In this position, Mário Pires is responsible for meeting the interests and needs of intermediary and institutional clients in Portugal, as well as growing the business in the region.
September 2024, by Mario Pires
In the last 30 years, there have been few periods when inflation has been high, but in 2021-2022, with the reopening after the pandemic and the start of the Russia-Ukraine conflict, the scenario changed and inflation skyrocketed.
Although central banks have curbed the intensity of price rises by raising interest rates, there are long-lasting trends that will continue to influence the pace of economic growth and put pressure on price rises, making inflation more than just fleeting.
What are these trends?
We can summarize them as the 3 Ds: Deglobalisation, Decarbonisation and Demography.
Deglobalization
For example, the price of moving shipping containers from Shanghai to Europe (the Netherlands) cost almost six times more in mid-July 2024 than in mid-December 2023, an increase largely due to the escalation of conflicts in the Middle East, which forced these ships to deviate from their route through the Suez Canal and make a much longer and more expensive journey.
But there are other reasons for the rise in prices, such as the increase in customs duties on Chinese products, which has become more acute in Trump's US, and which has also been reinforced in the European Union for various goods - such as electric vehicles.
Many countries and companies have understood the importance of producing closer to home and also of protecting their production from competition they consider unfair. But reorganizing production and supply chains takes time, investment and, in many cases, means producing more expensively.
Reconfiguring economies to rely on renewable sources comes at a price. Not only investing in new “green” technologies and infrastructures, but also discouraging production based on fossil fuels.
Because of this and the direct impacts of climate change - higher temperatures, extreme fires, floods, etc. - part of production will be affected, reducing overall economic output. In this sense, climate action, which will continue and intensify over the coming decades, is also a stagflationary force, i.e. it is yet another reason for economic growth to remain contained and inflation to remain high.
Demography
With fewer births and greater longevity, an aging population is already a reality in many countries and as older people retire there is no longer a working-age population to replace them.
Ongoing labor shortages tend to lead to higher wage costs, with repercussions on prices. And with inflation on the rise, workers are demanding higher wages to cope with rising living costs, leading to a snowball effect.
Increasing the workforce through immigration could be an option, but in many countries - post-Trump US, post-Brexit UK and many others - a “more welcoming” emigration policy is politically unlikely.
Any of the 3Ds is a source of pressures that fuel inflation, but all of them offer opportunities for investors who know how to surround themselves with those who can identify them and anticipate their value.
For example, new technologies such as robotics and artificial intelligence are ways of increasing productivity and getting around the shortage of professionals. Likewise, investment in the energy transition - technologies, infrastructures and energy security - will continue to bring opportunities in the medium and long term. And the same goes for various solutions aimed at the growing elderly population, especially in countries where the state provides the least, or in geographies that stand to gain from the rapprochement of supply chains.
These are just some of the more obvious areas where opportunities can be found in this new normal, of which inflation is once again a part.