Prices rose just about everywhere in 2021.
Most of the causes—supply and labor shortages, rising energy prices, pent-up consumer demand, aggressive fiscal stimulus—can be traced directly to the Covid-19 pandemic.
And as we're reminded almost daily, the pandemic isn't over. With supplies constrained and demand strong, anxiety about inflation is on the rise.
For much of 2021, many of the forces stoking inflation appeared to be transitory. Supply disruptions, including raw material and labor shortages and congestion at ports, severed key links in global supply chains, forcing up prices at a time when demand for goods was strong. Some of the resulting cost pressures may ease as supply chains are repaired and the effects of pent up demand start to fade.
But transitory may not mean the rate of inflation will fall quickly in 2022. Prices for some goods, including shelter, may continue to rise above their pre-Covid-19 levels for some time. Autos are another wildcard; inflation has been high in this sector and could remain so if semiconductor shortages are not resolved until 2023. Solid wage growth and inflation expectations (Exhibits 1, 2) are also likely to prevent a swift return to the low inflation environment that has persisted in recent years, though the effects will vary across economies. Wage pressures in particular appeared to be a key factor behind the US Federal Reserve's late 2021 policy pivot toward tighter monetary policy. If goods prices don't ease and price pressures expand due to the demand for services as economies fully reopen, we could see a further increase in inflation above the Fed's 2% average target. Though it hasn't happened yet, sustained higher inflation could push up intermediate bond yields and take the 10-year US Treasury yield above 2% for the first time since mid-2019, potentially causing problems for longer duration fixed income strategies and growth stocks.
Exhibit 1: US ECI experienced its strongest annual rise since 2001 in Q3
Source: Macrobond, Goldman Sachs Asset Management. As of 2021 Q3.
Exhibit 2: UK private sector wage growth is high but moderating
Source: Macrobond, Goldman Sachs Asset Management. As of September 2021. Three month moving average.
If health concerns fade, we believe an increase in labor force participation may help temper wage growth. A slowdown in commodity price gains may also reduce inflation expectations. Still, in this uncertain environment, investors may want to consider tilting toward strategies that have typically done well when prices rise given the potential for inflation to run warmer than it did during the last cycle, if not quite as a hot as it did in the 1970s.
Keep up to date with what’s happening in inflation updates with the latest insights from Goldman Sachs Asset Management.