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No matter how hard we might try, we cannot reliably forecast financial markets – a reality I have learned over decades of attempts, including as a global market strategist. However, we can still diagnose the economic factors that have led to the market conditions we are seeing today and try to make predictions for what is to come. That thought process is true with the inflation we saw balloon in 2022 and should provide helpful insights for business leaders planning the trajectories of their bottom lines.

To state the obvious, the recent rise in inflation is unprecedented in this generation. Probably because it is unprecedented, it is largely unexpected as evidenced by where world markets were pricing long-term bonds through the end of 2022. Well-documented, major contributors to this inflation episode include supply-chain disruptions due to the global pandemic, increased demand in part from pandemic relief measures and the invasion of Ukraine, which affected global food and energy supplies.

The discussion of how great an impact a prolonged period of easy money had on this inflationary cycle is beyond the scope of this essay, but it certainly did not serve to dampen inflation early on. All of this is known and while it was unusual, the cyclical elements of inflation may subside over time aided by the help of some central bank tightening that we have already seen. At a minimum, year-on-year comparisons should reveal that inflation is moderating.

The Origins of Today’s Rising Prices (And Wages)

Over the last few decades, we have lived a “charmed life” with respect to a structural increase in the supply of labor in advanced economies like the U.S., EU, UK and Japan. As a benefit of globalization and digitization, low-cost labor has moved around the world in the last 25 years. Over those 25 years, imports’ share of the world’s GDP increased dramatically. In the last 20 years, exports from China more than quadrupled.1 Until recently, tariffs over most of that period were reduced thanks to bilateral and multilateral trade agreements. These factors have probably been the major contributors to inflation being lower and more correlated in these advanced economies, averaging just over 2% over that period.

For these advanced economies, what has not risen more than inflation is wages. Workers competed with an unprecedented increase in the global supply of labor – including skilled labor, which flooded advanced economies after the fall of the Soviet Union in the 1990s and the opening of China in the 2000s. There are probably several other reasons for the lack of real wage growth, including the decline in organized labor’s share of the workforce, but the swift and strong increase in labor supply was probably the most determinant factor.

In coming years, these moderating inflationary forces are likely to be eroded by a variety of domestic and global economic, political, social, health and security concerns. In particular, a globally tight labor market may well lead to a rise in secular inflation. Without the benefit of a significant increase in global labor supply like we saw in the 1990s and the 2000s, wages are likely to move higher and drive up inflation.

Wages in these sectors are rising with a lag but with a rate that remains less than inflation. Those wage hikes will have an enduring impact. They are not going to come down – that is the principal concern.

Secular Impacts from Service Sectors

We recognize there are several contributors to inflation statistics. Food and energy are areas over which policy has very little control and which have contributed dramatically to increasing inflation. That increase has been even more dramatic in the UK and Europe since the U.S. has a higher degree of food and energy self-sufficiency than either.

Housing costs, another important category of inflation, have been affected by a shortage of available homes, as well as the Fed’s policy of raising interest rates, which has an immediate effect on mortgages. In practical terms, mortgage payments have drastically increased for consumers.

Then there are goods that throughout the pandemic have been impacted by the prices of transportation, disruptions to the supply chain and costs of raw materials. Inflation for goods can have a short-term impact.

While these three areas have certainly hit consumers in their wallets, the thing that is most concerning from a long-term perspective is the service economy – a concern that is secular in nature.

In service-centric industries, labor is more important to the bottom line and wages tend to be sticky. In other words, wages go up but very rarely come down. For many of these businesses, wages make up about two-thirds of costs – a proportion that is increasing. These businesses include everything from restaurants, hotels and hairdressers to healthcare, where chronic workforce shortages mean providers can demand a premium that has been a long time coming.

Wages in these sectors are rising with a lag but with a rate that remains less than inflation. Those wage hikes will have an enduring impact. They are not going to come down – that is the principal concern.

Movements to Manage

Generally, there are three ways that we can deal with wage-price inflation: A major recession where wages come down, a decrease in profit margins or, concerningly, inflation remains high and gets embedded in the system. We do not want to fall into the last scenario.

On the fiscal side, governments around the world got a clear message from the UK and Liz Truss’s short-lived government that trying to spend their way to cure this cycle is going to result in severe repercussions in the financial markets. As evidence, we saw the UK’s currency, bond markets and stock markets all crater in a matter of days.2

Central banks around the world are being clear that their role in containing inflation is to raise interest rates, and the recent cyclical increase in wages and inflation may indeed subside as a result of a monetarily induced recession – the most effective way to deal with inflation. However, the secular forces already at play may keep inflation higher for longer than we have seen for well over a generation and those forces go beyond sea changes in the labor supply.

Unfortunately for both globalization and digitization, the list of domestic and global challenges is long and often mutually reinforcing.

Lower Impact of Deflationary Forces

Beyond labor supply, globalization and digitization’s deflationary benefits are under threat. The connections of a global value chain have reinforced an increased labor supply in recent decades. A 2021 study by the European Central Bank discussed how trade integration has enabled a geographic shift in manufactured goods toward emerging market economies with an abundance of low-cost labor because of an unprecedented increase in the supply of labor.3

Now, increasing globalization benefits are being weighed against global health challenges, geopolitical unrest (e.g., the war in Ukraine), climate change and more. All these factors are impacting supply chains. For example, we have seen disruption in the availability of goods shipped from countries where differing pandemic responses could limit supply, as in China and its zero-COVID policy. This policy disrupted supply and had a dramatic near-term impact on inflation. For companies with sizable production or components from China or other markets, these recent lessons might cause them to rethink their dependence on that country for these geopolitical reasons. In the short term, China’s reversal of this policy should have an inflationary impact as it will drive demand from the world’s second-largest economy, even with the relaxation of supply chains.4

Digitization, meanwhile, reduced consumer search efforts and costs while improving efficiency and productivity for producers. Increased competition also dampened price increases. Today, new technologies like AI, blockchain and micro-robotics have the potential to further improve productivity to help offset higher wages and decrease unit labor costs. However, the balance is that leaders are becoming more cautious about global digitization; there is a lot of paranoia about digitization, and for good reason – cybersecurity is a real threat and businesses cannot risk a breach.

Unfortunately for both globalization and digitization, the list of domestic and global challenges is long and often mutually reinforcing. These threats include rising nationalism, higher tariffs, limited mobility of labor from closed borders, increased national security concerns limiting the sale of certain goods, historically high income and wealth gaps, and cybersecurity risks. That list does not even touch on the impacts of climate change and the search for clean energy sources.

The European Central Bank study stated that to keep the cost of goods down, low-wage countries must be fully integrated into the supply chain. It is becoming harder to imagine that being the case in the immediate future.

(Trying to) Predict the Markets

Even though we cannot know for certain what will happen in the markets, we can make some educated guesses. In my opinion:

  • In the short run, inflation is going to go down. The question is where it will land.
  • I live in a probabilistic world. While the risk of further instability is high, if some recent geopolitical events abate, particularly in Ukraine and China, there will be substantially lower inflation.
  • Inflation is measured on a year-on-year effect. If wages rise 4% this year and inflation retreats to 4%, then consumers retain their earning power.

The question then becomes how much inflation might come down and how fast.

If some of the short-term inflationary impacts on food, housing and goods abate, will we return to sub-3% inflation soon? The consumers and the bond markets seem to think so. The October 2022 University of Michigan Consumer Sentiment Survey pinpoints expected inflation in five years at just under 3%.5 Some bond futures readings indicate that the markets expect the 10-year U.S. government bond to be yielding just under 4% for a prolonged period. Although it is possible to assume the cyclical peak in inflation might have passed in a year or so, a return to substantially lower medium-term inflation may take longer owing to the shifting secular trends in wages, globalization and digitization.

Broadly, business leaders must consider the possibility that inflation is going to be slightly higher for slightly longer than most forecasts are calling for right now. They should think of what that means for current forecasting and capital spending plans because those levels of inflation are not being priced into markets currently. The long end of the bond market is not priced correctly and has to go up.

I have seen service companies forecast a level of revenues and costs (particularly wage costs) as going down to 2% as early as 2023-24. What I have said to organizations where I have responsibility is that they should consider doing some alternative projections: What happens if inflation is closer to 3-4% and wages continue to increase? There is a big difference between 2% and 4%.

I was in the markets in the 1970s, which was a particularly painful experience. I do not know if we will get to that severe level of inflation with a corresponding recession, or worse yet, enter a sustained period of stagflation as we saw then. Our economy today is a little more fluid and global than it was back then. Having said that, very few people active in financial markets today have any idea what that time was like. If we come close to that kind of market upset again, we could experience the same disruptions in the markets we saw 50 years ago. The secular forces at play – with health and security concerns added to the usual domestic and global economic, political and social forces – have stoked the fires of inflation and may serve to keep those fires burning for longer than the world has experienced for well over a generation.


Jeffrey has over 50 years of experience in asset management. He is Chair of the Board of Aviva N.A. Holdings Ltd and serves on the Board of Aviva Investors Holdings Ltd. He previously served as Chairman and CEO of Grosvenor Fund Management and Director of Grosvenor Group Limited. Jeffrey was the Founding and Managing Partner at Buttonwood Capital Partners.

Jeffrey spent the majority of his career at Goldman Sachs as a Partner, CEO and Chief Investment Officer of Goldman Sachs Asset Management International. Prior to Goldman, he was with Wertheim & Co.

Jeffrey graduated with a B.S. with honors from The Wharton School of the University of Pennsylvania.

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