Ben Inker: what could go wrong

Inflation in America probably won't surge higher, reckons GMO's Ben Inker. Nevertheless, investors shouldn't discount it.

"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".

However, it's clear "that a significant inflation shock would be just about the worst thing that could happen to today's investment portfolios". While "depressions are bad for risk assets and good for high-quality bonds, inflation is very bad for high-quality bonds and modestly bad for stocks". And right now, "not only would bonds do particularly badly given their very low real yields, but stocks could get hit worse than you'd otherwise expect given their high valuations". Indeed, "the combination of bonds and cash suddenly yielding quite a bit in both nominal and real [after-inflation] terms seems likely to be utterly devastating to today's high valuations".

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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".

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

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