Examining the source of the current inflation

We are in a situation in which natural gas prices have increased by 500% in Europe and 100% in the U.S. We are also seeing the effects of the supply and demand imbalance, a result of the easing of restrictions imposed by the pandemic and the increase in mobility. Furthermore, the situation generated by circumstances such as the container shortage or the increase in oil prices cannot be overlooked.

Funds People organized a round table discussion with State Street Global Advisors to analyze whether the inflation phenomenon will be permanent or transitory. MAPFRE AM General Manager Javier Lendines participated on the panel on behalf of MAPFRE. The expert believes that reasons can be found to defend both positions. However, for now, he sides with the analysts and managers who believe it is transitory, in line with the position defended by the central banks. “As managers, the important thing is to evaluate how we position ourselves in these scenarios.” He explains that the most damaging situation is for inflation to become permanent. “One argument for those who believe inflation can stabilize at high rates is that central banks continue to print a lot of money.”

He also adds that states need some inflation to deflate high debt volumes, and it is important to remember that regulation is inflationary, especially in Europe. Finally, he points out that “as long as this inflation is maintained, an upward spiral in wages and pensions may start to form.”

In this scenario, in which there is a possibility of inflation becoming more structural, he explains that the first thing that portfolio managers are doing is to analyze how assets have performed during other inflationary periods. However, there have not been many. “In the developed markets, there have been few. In the U.S., there have been just eight episodes. Latin America is a different story, and MAPFRE has a lot of experience there due to its exposure to the region.”