Why the ongoing inflationary phase is transient and what investors must do

Global central banks are striving to tame inflation, which was earlier considered a transitory element. However, the central banks seem to be shifting toward an aggressive approach. Considering ongoing uncertainties, only time ahead can clarify what direction the world’s economy would move.

Understanding Low Inflation
To predict the future, we need to take a step into the past. For example, in the last 40 years, the world has enjoyed low inflation. That’s because the world economy only began to open up in the last 40 years. Thanks to a robust supply chain, it has slowly evolved to become one integrated market.

But in the past two decades, most developed countries have outsourced production to Asian countries, with China being the leading supply chain for global economies. China’s competitive pricing also helped lower global inflation to a great extent.

Globally, the developed world is experiencing a rapid demographic transition. Given an ageing population on the rise, demand for goods and services has reduced. Hence, as demand diminished, inflation eventually remained soft.

What Triggered the Spike?
In the initial days of the pandemic, global central banks began to pump money into the markets to support their economies.

Due to that, more money started to chase goods and services, driving up prices. Moreover, worldwide lockdowns further aggravated the situation. To add to it, the Russian invasion of Ukraine and the rise of crude oil prices and gasoline have started to surge. All these factors have increased inflation worldwide, emphasizing the surge in crude oil prices hastening inflation. But this inflation may not remain elevated for an extended period.

While many believe we need to live with higher inflation for longer periods, I believe it will cool off quickly.

Here’s why.

Across the world, global central banks are raising interest rates to stop inflation from spiralling out of control and categorically stating their commitment to bringing down inflation through monetary policy instruments. For example, in India, RBI raised its benchmark interest rate by 50 basis points (bps) earlier in June, over and above the 40-bps rate hike done in May.

Tightening rate cycles and poor stock market sentiments started impacting the demand. At the same time, pent-up demand post the lockdown began waning, creating a situation where inflation could remain more transient than the consensus view of

.

The way commodity prices have corrected, be it copper, aluminium, or steel, suggests that inflation is likely to come under control much faster than widely held belief. Even though we believe that crude oil prices — the decisive factor for inflation — should start climbing down by October, they could remain below $100 per barrel.

Remember, India is much better at bringing down inflation than other countries. So, while other countries may struggle with inflation, India should do well as the government did not expand its balance sheet sufficiently enough like the developed economy.

Caveats to Note
The only hitch to bringing India’s inflation under control is if the rain gods do not turn in India’s favour. India, a monsoon country, depends heavily on southwest winds to shower rain and economic blessings. Also, the risk to my prediction is that crude oil prices may not decline as sharply as predicted.

What Must Investors Do
The stock market is a cyclical beast, and what goes up must come down and vice versa. So now is the time to buy stocks at attractive valuations, with solid growth prospects, within a diversified portfolio to protect the current value of your portfolio.

The Indian stock market has weathered inflation scares in the past and has increased after every decline. While other leading economies face 40-year high inflation, it is not the same with India. Hence, inflation worry must not be a factor when considering an increased allocation to equity.

India is in a much better position to control inflation than the rest of the world. As a result, India’s inflation is lower than the developed world for the first time in many decades, and we need to note this new trend.

(The author is the Chief Investment Officer at MarketsMojo)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)