Inflation scale
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Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about inflation with Blerina Uruçi, chief U.S. economist with T. Rowe Price. We talked about wages and the job market, why some market readings have been confusing, and we started by asking about the Fed’s progress in bringing inflation down.

Blerina Uruçi (BU): I would say that we’re probably not going to get to 2% on inflation until late 2025 or even early 2026. We haven’t seen the degree of destruction in domestic demand that would bring inflation pressures down more slowly. And how have central banks handled this situation? I would not give them a bad score. It was a very challenging time. We had to keep in mind many risks. But I would say that for a central bank like the Fed, they have a dual mandate, which is full employment as well as bringing inflation down to 2%. Now, at times when inflation is very high, clearly the focus becomes the part of the mandate that you are missing by a large degree. So the focus became inflation. Now that inflation has come down from its peak, I think the Fed is paying attention to both sides of its dual mandate and is prepared to be patient to bring inflation down to 2%.

On wages and the job market

BU: What is driving inflation. Is this cost-push inflation or demand-pull inflation? Typically cost-push inflation is where you start getting worried about wage-price spirals. I don’t think this is what we experienced in the U.S. I think we very much experienced demand-pull inflation where demand is so strong and firms are able to pass on price cost increases as well as maintaining a healthy profit margin. Wage pressures also increased. And what drove the acceleration in wages, I think, was the fact that we had a lot of vacancies per unemployed workers. We had two job postings for every unemployed worker. And what we also know is that workers that switch jobs get higher wage increases. So, in an economy with many vacancies, with many workers moving to higher-paid jobs, we also saw an acceleration in wage pressures. As vacancies have come down and labour market churn has slowed, we are also seeing wage inflation come down. And this is happening even as the unemployment rate hasn’t increased. So this makes me think that this is demand-pull inflation, not a wage-price spiral.

Confusing market readings

BU: We are grappling right now with why the U.S. economy and demand in general was so strong in the second half of last year, and why the economy is not slowing down as much as one would have expected even if interest rates have increased to 5.5%. I think, there is a big debate whether this is because the economy is less interest-rate sensitive. For example, a lot of consumer and corporate debt has been locked in at lower interest rates. So that means we’re not feeling the pain from higher interest rates. Or whether there has been a dynamic shift in the U.S. economy, where the equilibrium interest rate — or the neutral interest rate — is higher than we thought. And what that means is that perhaps potential growth and productivity and labour supply in the U.S. might be increasing in a way that means central banks will have to keep interest rates higher for longer.

And finally, what’s the takeaway for wealth professionals?

BU: Let’s not just focus on the consensus narrative. Because oftentimes we’ll have outsized positive or negative returns when we miss the consensus narrative. So let’s position our portfolios in a way that we have hedges if inflation were to remain higher for longer. And those short-dated credit assets would perform well in this world, as well as inflation-linked bonds that hedge investors toward higher inflation. And then in a Goldilocks scenario, I think this would be a good opportunity to start buying the dip and adding duration to portfolios.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Blerina Uruçi of T. Rowe Price. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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