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Stagflation: What should we expect?

Speaking at the Australian Institute of Superannuation Trustees (AIST) ASI 2022 conference, a panel of economic experts shared their views on the current stagflationary environment.

"Inflation's certainly here to stay in the near term," QIC chief economist Matthew Peter said.

"The central banks aren't going to get a lot of signal from prices for inflation to alter their path. So we're going to see sustained inflation in the near term. In turn, we are condemned to a stagflationary environment.

"The story from central banks is that they're going to do whatever it takes to sustain growth, but I don't believe that to be the case at all."

Peter pondered: "I don't think they will follow through with that, but there has to be some reason why they are not going to these lengths that the market is saying they're going to go to."

"The market is currently pricing in the Reserve Bank to take the cash rate to 4% by June next year. That's at least 50 basis points higher than what a natural break is and one and a half percentage points about what the RBA is declaring they are going to take rates to already."

Meanwhile, IFM Investors chief economist Alex Joiner said: "We like to think that central banks will not commit two mistakes."

"They've already made one mistake, thinking inflation was transitory, which it's clearly not. We hope they don't rush in and commitment a second mistake by being overly confident in their ability to actually do something about it."

Joiner added: "I think households may be cashed up but that's quickly been eroded by inflation. Things like petrol prices, electricity prices, all these things sort of eating away at that household balance sheet and all those accumulated savings."

According to Joiner, collapsing global consumer confidence should also be taken seriously.

"We are seeing this in all major economies... Consumers don't like inflation and interest rates compounding in terms of cost of living," he said.

"What I really think that central banks will need to do is put the brakes on economies and really have that demand destruction effect. Therefore, if we get a soft landing we're going to have to see the central banks pivot, and that's obviously something that markets, particular equity markets are looking for and fixed income markets are looking for in terms of an inflection point."

CareSuper head of investment strategy Cindy Ponder-Budd also believes we are on the cusp of a regime change; "particularly with inflation, and even growth, that stems from heightened levels of geopolitical tension, the peak of globalisation."

"Governments are going to need to make extraordinary amounts of investments over the next five-10 years, open this transition to a sustainable economy, but Western governments particularly are going to need to combat aging demographics, entitlement programs, and with the current hostilities in Europe, will probably going to need to spend more on defence," she said.

"We're used to this huge excess savings pool globally, and now, that this could potentially be channeled into investment."

According to Ponder-Budd, this also means a real changing of the guard in terms of monetary and fiscal policy.

"We're used to monetary policy being there. In the past, if there was a global financial crisis or a market sell down, we had the Fed foot to central banks, pumping liquidity into the system and cutting rates to zero. In an environment of higher inflation, they simply can't do that. So with fiscal policy, governments are going to have to be a much bigger driver of growth," she said.

Ponder-Budd noted that after two years of extraordinary spending, it's uncertain that global governments can take up this role of being a driver of growth.

She said: "What that means for investments is lower return and certainly higher volatility, but I think for people it really does present opportunities across geographies, across asset classes, across styles, and really gives us the opportunity to add value in this new environment."

Read more: Alex JoinerAustralian Institute of Superannuation Trustees ASICindy Ponder-BuddDr Matthew PeterQIC