Inflation – Surprise, Surprise!

| Multi-Asset

20211129 COTD x 3 Inflation_Surprise, Surprise_chart website

Source: Unigestion, Bloomberg as of 26 November 2021.

One of the guiding principles of our investment process is that macroeconomic regimes determine asset returns over the medium term. It is therefore essential to monitor the macroeconomic context and its various dimensions (activity, inflation, monetary policy, sentiment, valuation, etc.) in real time in order to dissociate what stems from a fundamental change as opposed to noise.

Looking specifically at inflation, our proprietary Nowcasters, combined with a thorough analysis of the post-Covid supply chain – characterised by the absence of inventories and an overdependence on certain geographical areas and specific components – led us to identify very early on the risk of a „supply shock“ as the most important factor for inflation in 2021. The fiscal stimulus, first used as precautionary savings and then as consumption, has added a “demand” effect to the initial “supply shock”, transforming the expected base effect on inflation in H1 2021 into a monumental inflation surprise. The magnitude of the shock is clearly visible in our chart, where the volatility of inflation has risen dramatically this year, to levels not seen since the 1974 oil shock.

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