Taking the Measure of Inflation | Lord Abbett
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Market View

Amid recent headlines about supply squeezes and price pressures, our experts offer some useful perspective for investors.

Read time: 3 minutes

With the U.S. economy rebounding from the body blows of the COVID-19 pandemic, investors have wondered if the rapid rate of growth in gross domestic product presages a sustained rise in inflation. In this Market View, adapted from the cover story of the July 2021 issue of Lord Abbett Insights, we asked Giulio Martini, Lord Abbett Partner and Director of Strategic Asset Allocation, for his perspective.

It’s important to understand that inflation is not an event. Inflation is a process that has many steps and unfolds over a long period of time.

So why are investors worried about inflation right now? What is it in the environment that’s upsetting some people? I think it all ties back to significant imbalances in the U.S. economy resulting from the COVID-19 outbreak. They’ve arisen because we have some very serious mismatches coming out of the pandemic.

The most important one is a mismatch between the demand for labor, which is coming back very quickly, and the supply of labor, which is returning much more slowly, because of factors like early retirements triggered by COVID-19, healthcare concerns, and family considerations before school reopenings. Expanded unemployment insurance payments have also played a part. That mismatch is creating a lot of upward wage pressure (Figure 1).  Wage inflation normally moderates after economic downturns, as it did following the 2008-09 financial crisis, but it appears to be picking up in the current recovery. This aligns with widespread anecdotal reports of labor shortages by employers and ease in finding jobs by households.


Figure 1. Amid the Reopening, U.S. Hourly Earnings Have Risen Sharply
Change in standard and sector-weighted U.S. hourly earnings, March 31, 2007-June 30,2021

Source: U.S. Federal Reserve Bank of St. Louis FRED database. Data as of 06/30/2021. For illustrative purposes only.


Another big factor is upward pressure on house prices. We had a shortage of housing before the pandemic. But COVID-19 has really increased the demand for housing very quickly as people have moved. And so, house prices have started to go up very significantly. Rising house prices lead to rising rents down the road, and rentals account for one fifth of the U.S. consumer price index (CPI).

As of this writing, the U.S. Federal Reserve (Fed) does not believe we are facing a serious threat of long-term inflation. What they think we’re having is a temporary period in which inflation goes from the roughly 2% pre-pandemic level up to 4% or 5%, as the economy processes some short-term supply/demand imbalances. We think the Fed’s view is that this year and in early 2022, the short-term price pressures will ease, and the CPI will come back down to 2%. That’s not a “regime change” for inflation. Since the Fed believes higher inflation is temporary, it hasn’t even started rolling back any of the stimulus that was put into place during the pandemic. And the markets and investors seem to agree with the Fed for now.

Of course, there is always a risk that the Fed could be wrong, and that inflation turns out to be more persistent than what investors are expecting now. A sharp increase in spending triggered by the cumulative effect of the U.S. stimulus programs could turbocharge demand—and could create a longer period of high inflation than the market expects.

Takeaways for Investors

That said, we will repeat our earlier assertion: Inflation is a process, not an event. As such, we believe it’s too early for investors to consider substantial changes to their portfolios to prepare for a significant, sustained rise in inflation. Even if that does happen, history shows that the beginning of an inflationary process doesn’t have to be terrible for the markets. For example, inflation started to accelerate in the mid-1960s, but the U.S. stock market was largely unaffected and reached an inflation-adjusted high in 1971-72. So, there were five or six years of inflation picking up gradually before it became threatening enough for the market to respond negatively.

We think the lesson here is that you don’t want to be exiting riskier assets such as high yield bonds or stocks at the beginning of a potential pickup in inflation. Any potential portfolio moves should only be considered at the point where the inflation becomes high enough to be threatening, and in our view, we are nowhere near that juncture.

The bottom line: We think investors shouldn’t overreact to the potential for rising inflation by making sudden and significant changes to their portfolios.


Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

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Glossary Definitions

The U.S. Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.This material is the copyright © 2021 of Lord, Abbett & Co. LLC. All Rights Reserved.  

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    Market View




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