The best possible medicine for high inflation is often an old-fashioned recession

Ariel Bezalel, head of fixed income at Jupiter AM and manager of the Dynamic Bond fund, and Harry Richards, manager of fixed income funds at the manager, explain how inflation fears are fading as economic growth slows, and the impact this could have on fixed income investors.

“We believe that concerns about inflation may be a thing of the past”experts say. However, they point out that “ultimately and unfortunately the best possible medicine for high inflation is usually an old-fashioned recession and warn that “From a purely technical point of view, Europe and even the United States could already be in recession.”

“The latest news may seem contradictory: the latest CPI data remains stubbornly high at 8.5%, and the latest US jobs figure was a huge positive surprise. Secondly, economic data continues to deteriorate, with consumer sentiment down and commodity prices rising. Market movements have also been contradictory: we have seen a very strong rebound in equity and credit markets, but government bond yields point to slower growth.” experts explain.

According to Ariel Bezalel and Harry Richards, the current inflationary episode occurred for several reasons:

  1. Supply and demand shocks: “Consumer goods were the first driver as Covid restrictions changed consumption patterns in an already complex environment for supply chains. Now we see a significant reduction in supply chain problems and the demand for consumer goods is also starting to become more volatile.”
  2. Raw material prices:When the Ukraine conflict began, commodity prices skyrocketed, causing inflation. While the uncertainty of the war continues, the prices of most raw materials are now experiencing significant declines. This significant decline in commodity prices will gradually feed through to the CPI figures.”
  3. House prices: “There has been a rise in rents in the US, a consequence of a long-standing exorbitant housing market. In the future, the housing sector could be even more complex. Rising mortgage interest rates have reduced housing affordability and new mortgage applications.”

“In the face of the looming recession and the absence of substantive changes in secular demographic and technology trends, government bond yields (especially in the US, Australia, South Korea and New Zealand) look attractive both from a financial and financial point of view. both from a total return and from a hedging perspective. Despite uncertain global growth prospects, it is an exciting time to be a fixed income investor as yields have recovered to heights not seen in decades”, experts conclude.

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