Inflation Is Here! What Now?

  • Inflation is rising rapidly, not an unexpected outcome given governments’ pandemic policy response of ballooning deficits and soaring government debt.

  • Investors can take steps now to position their portfolios for a high-inflation environment by allocating to value stocks around the globe as well as taking advantage of below-zero real interest rates to finance purchases of real assets, whose prices tend to rise with inflation.

When I started my career in the early ’80s, many countries around the world were infected with a miserable inflation disease. Diagnosing the cause of double-digit inflation and administering a cure was the key problem for economists and central bankers. Inflation was ultimately defeated at a significant economic cost—two nasty recessions. Fast-forward the clock by four decades, and inflation is rearing its ugly head again. Is it here to stay and what should investors do about it?

Today’s inflation isn’t a surprise. Over the past two years, governments have embraced Modern Monetary Theory (MMT) in practice, if not explicitly. To cushion the economic pain inflicted by the pandemic, governments understandably coordinated their fiscal and monetary policies to transfer newly created money directly into bank accounts without raising tax receipts. As I predicted last spring, deficits are ballooning, government debt is soaring, and inflation is spiking.

Collectively across the G7 (United States, United Kingdom, Germany, France, Canada, Japan, and Italy) total debt levels as a percentage of GDP have doubled over the last 25 years, jumping from an average 80% in 1995 to over 160% in 2020. Over the quarter-century span, the sharpest annual increase in debt to GDP occurred in 2021, well outpacing the 14% surge during the 2008–2009 global financial crisis (GFC).