"A year ago, the US economy seemed poised for a significant shift," says Ben Inker, chief investment officer at US asset manager GMO. With inflation hovering around the Federal Reserve's target level, and unemployment sitting at most experts' estimates of full employment, the US central bank "was promising to, if not take away the punchbowl, at least begin diluting the alcohol content". As a result, it looked as though we would finally get some idea of "whether interest rates would ever be able to go back to the levels that we all used to think of as normal".
As it turned out, 2017 didn't play out that way. Inflation remained subdued despite continued falls in unemployment. As a result, investors have been left "with continued uncertainty about interest rates". And, says Inker, "absent the excitement over the Faang stocks, this seems to be about the least enthusiastic bull market in history".
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An inflation surge certainly isn't inevitable. But "it is something that investors should have in the forefront of their minds when they think about what could go wrong".
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