Secular drivers of inflation


Michelle Butler

Senior Portfolio Specialist

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4 minute read

January 2024


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Recent data indicates a slowing inflation trend, yet risks persist. Secular forces suggest that a prolonged elevated inflation period is underway with the potential for periodic price spikes. Factors driving long-term inflation include commodity underinvestment, tight labor markets, geopolitics, deglobalization and fiscal uncertainty. We see parallels to past inflationary eras, which highlight the difficulty of controlling inflation. While not predicting a return to 9%, the expectation is for a decade of higher-than-accustomed inflation, underscoring the importance of having a real assets allocation.


Hi, I’m Michelle Butler, Senior Portfolio Specialist at Cohen & Steers.

Recent data showing inflation slowing has been encouraging, and we believe that trend will continue in 2024. However, inflationary risks remain abound, and we believe secular forces will likely result in inflation remaining elevated over the coming decade—certainly higher on average than what we were accustomed to in the preceding 10-year disinflationary regime. In this new “stagflationary” regime, the potential for periodic, unexpected inflationary bouts remains a real risk.

Let’s briefly look at some of the factors behind this assessment.

One: Commodity underinvestment. Because commodity prices are primarily influenced by supply/demand forces, there is a saying that “low prices solve low prices” and “high prices solve high prices.” The pullback in commodities in the mid-2010s, due to persistent oversupply at the time, forced capital discipline on commodity producers, which reigned in supply. Today, energy and mining companies are focused on strengthening their balance sheets and creating shareholder value through a more restrained supply growth mentality. Consequently, inventories for many commodities sit near 10-year lows.

Current supply/demand imbalances are supportive of commodity prices. Additionally, production costs often rise as a consequence of higher interest rates, which may further exacerbate inflationary pressures.

Two: Tight labor markets. Labor undersupply, driven by a reduction of available, qualified workers, has given employees greater bargaining power, which has increased wage pressures. Wage inflation is notoriously “sticky” and may reinforce demand-pull inflationary forces that remain broadly present in the market today.

Three: Geopolitics & deglobalization. As we’ve seen with the Russia–Ukraine war, geopolitical tensions, economic sanctions and disrupted supply chains can lead to inflationary price spikes of key raw materials if taken offline, and may lead to increased deglobalization or “friend-shoring,” which essentially means countries trading with those that adhere to similar business practices and values.

Friend-shoring encourages trade partner selectivity over potentially trading with the lowest-cost producer, which inherently limits the supply of low-cost goods, services, and labor. Again, increasing the risk of inflation.

Four: Fiscal uncertainty. In the wake of both the global financial crisis and the Covid pandemic, fiscal obligations have reached near-historic levels across most major economies. Political pressure to further stimulate against the backdrop of already burdensome debts creates incentives for policymakers to inflate away debt obligations, driving up investor skepticism and, potentially, interest rates, resulting in higher interest expense, policy uncertainty and spending levels and, consequently, persistent inflationary expectations.

There’s an addage that history doesn’t repeat, but it often does rhymes. We believe there are two modern analogs to today’s inflationary environment, namely, the World War Two era and its aftermath, and the infamous ‘1970s-inflation era.

As you can see, in both prior inflationary regimes, after inflation was initially contained, and, we are currently still in the containment zone now (represented by the dotted green line). Interestingly there was a resurgence in inflation in the months and years following, showing the difficulty for policymakers to control inflation when the starting point is as high as it has been and when inflation is supply-driven and embedded in market dynamics.

It’s not our base case that inflation is going to revert back up to 9%, but at the same time, when you look back and learn from history, we also can’t rule that out. We certainly believe that despite inflation trending lower, on average over the next decade, we will be living with higher inflation than we have been accustomed to. And that’s why maintaining an allocation to real assets is so important from a strategic perspective.

Timing the market, and especially inflation (which loves to surprise) with precision is likely a losing strategy.

We have long advocated that investors maintain a strategic allocation to real assets given the portfolio diversification, total return and inflation sensitivity benefits. For all three of those key features, the asset class appears particularly well-positioned for the coming years.

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Michelle Butler, Senior Vice President, is a Real Assets Portfolio Specialist for Cohen & Steers, specializing in Global Listed Infrastructure, Midstream Energy, and Commodities.


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