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Capital IdeasTM

Investment insights from Capital Group

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Inflation
The case for a higher-inflation regime
Robert Lind
Economist
May 3, 2023
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Financial markets are convinced headline inflation rates will fall sharply towards central bank targets over the next two years, with stable expectations in the medium to longer term.


Five-year forward inflation swaps, for example, are pricing in CPI inflation of around 2.5% in both the US and the eurozone.


2.5% CPI expected in US and eurozone

2.5% CPI expected in US and eurozone

Forecasts shown for illustrative purposes only.
Source: Bloomberg

But Capital Group economist Robert Lind believes markets could be underestimating a potential shift to a higher-inflation regime, as a result of structural loosening of fiscal policy, a shift in bargaining power to workers, and trade fragmentation.


While Lind says central banks are likely to maintain their tough rhetoric, he explains in this paper why they may have to accommodate structurally higher inflation, as the costs of getting it back to target will be too onerous.


Robert Lind is an economist at Capital Group. He has 36 years of investment industry experience and has been with Capital Group for eight years. Prior to joining Capital, Robert worked as group chief economist at Anglo American. Before that, he was head of macro research at ABN AMRO. He holds a bachelor's degree in philosophy, politics and economics from Oxford University. Robert is based in London.

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