There are many prescriptions and forecast models for a coming inflation or the lack of it. They range widely. Some forecasts include deflation.
Inflation adjusted bonds (like TIPS) are currently priced for very low inflation. Nominal bond markets are saying that little to no inflation is expected. That is why high grade bonds are pricing a long trajectory of very low interest rates. Because of that, stock prices are projecting a strong upward path for growth stocks which are the market’s expected winners during the COVID-19 and post-COVID-19 period. Remember, the lower the interest rate, the higher is the cap rate derived asset value. In theory a discounting rate of zero would yield an asset price of infinity.
Now we have a new research note that examines the experience of inflation during the pandemic outbreak period in France. It may allow us to draw inferences for the United States and other economic regions and certain countries. We are sending it because there are many readers who would not normally obtain insights form this source.
Here’s the abstract of the paper and a link to it:
“During the lockdown, inflation in France fell sharply while households expected a sharp increase. The profound and sudden change in the structure of household consumption and the strong dispersion of price changes for commonly purchased goods (fresh food, fuel) could explain this unprecedented divergence, which is set to narrow.”
“Inflation and households’ inflation expectations during the Covid-19 pandemic,” Banque de France, July 17, 2020,
https://blocnotesdeleco.banque-france.fr/en/blog-entry/inflation-and-households-inflation-expectations-during-covid-19-pandemic
Readers, please note that our experience with the research department of the Banque de France spans decades. They are very helpful and easy to approach for dialogue on diverse topics. Much of their research is publicly available.
At Cumberland, we’re concerned about an inflation surprise to the upside. We’re not sure when and we’re not sure “if.” History suggests we can get rising inflation. But there is no real history to guide us during the COVID-19 shock period. That is why our bond portfolio strategy includes a “barbell.” Any reader who wishes more information on barbells may email me, and I will arrange a response to your inquiry.
David R. Kotok
Chairman of the Board & Chief Investment Officer
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