5 Views on What’s Next for Inflation

Analysis November 16, 2022 at 05:03 PM Share & Print

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With the end of 2022 rapidly coming into focus, many of the major asset management firms are publishing year-end outlooks and previews of what they expect to see next year.

Putnam Investments, for example, recently published a new Equity Insights report that considers the pace of inflation and its impact on investors’ portfolios, while J.P. Morgan just released its latest long-term capital markets assumptions, which also feature a focus on inflation.

According to the experts, higher rates of inflation will very likely persist well into next year, though there is reason to believe inflation is currently near a peak and could even begin to fall as the year ends. In the gallery are five of their predictions.

John Manganaro

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1. Consumer-Driven Inflation Is Proving Hard to Tame

Heading into the end of the year, the main challenge for the Federal Reserve is that the U.S. economy is very consumer driven, says Jacquelyne Cavanaugh, a portfolio manager and analyst at Putnam Investments.

Consumer spending accounts for almost 70% of U.S. gross domestic product, Cavanaugh notes, and the consumer remains extremely healthy heading into year-end, despite multiple interest-rate hikes in 2022.

“We are seeing high rates of spending, but savings accounts have been replenished,” Cavanaugh points out. “We still have a strong job market, and many people have not yet spent the stimulus cash that went into the system during the pandemic.”

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2. An Exciting Environment for Stock Pickers

Joshua Fillman, a Putnam portfolio manager and analyst, says consumers are certainly feeling the pressures of inflation as 2022 winds down. This presents considerable challenges, he says, both for family budgets and business profitability.

“However, environments like this can be exciting for stock pickers like us who are focused on fundamental research,” he says.

In less-volatile environments, much of the equity market tends to move together, with less dispersion in the performance of individual stocks. As Fillman explains, stocks will advance at the same pace regardless of the companies’ fundamental strengths or weaknesses.

“But in difficult markets like today, with a rapidly evolving macroeconomic backdrop, we see more differentiation in performance,” Fillman says.

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3. The 2020s Aren’t the 1970s

According to J.P. Morgan Asset Management Chief Global Strategist David Kelly, nearly every country in the developed world is currently experiencing its highest inflation rate in decades. Still, he is skeptical that the early 2020s will closely mirror the situation faced in the 1970s.

“We acknowledge that inflation expectations have moved sharply higher, in a development likely to reverberate for some years,” Kelly says. “But we are also skeptical about broader structural changes and attribute much of today’s high inflation to economic overheating.”

Kelly expects many of the secular forces that pushed inflation down during the prior three decades will in fact remain in place during 2023 and beyond.

"Our reading of current conditions suggests that citizens and governments prefer low inflation, and we expect central banks to work toward restoring broad price stability over the next few years," Kelly says.

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4. Expectations (Partly) Drive Interest Rate Reality

According to Kelly, elevated inflation expectations could add to actual inflation in 2023 and beyond. As economists frequently note, expectations play a key role in setting prices.

The high inflation seen around the world as the effects of the pandemic has eased is encouraging workers to demand higher wages, and companies are responding by rising their prices. Kelly says this effect, while worrying, will likely fade out entirely in the aftermath of a recession.

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5. Financial Sector Could Shine Despite Inflation

Inflation is typically not great for the economy or equity markets, but this could be a compelling environment for banks and financials.

“I believe we could see substantial earnings growth for banks, as higher interest rates bring higher net interest margins,” Cavanaugh says. “The only area in which banks are feeling a bit challenged is labor.”

Cavanaugh says this difficulty won’t outweigh the many financial sector tailwinds, though some caution is always warranted with industry-focused investment. Eventually, if the Fed is successful, the economy will see higher unemployment and higher credit losses.

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