Global investment manager T. Rowe Price expects that inflation will fade in 2022 but warned that a number of potential risks could emerge as a result of the pandemic.
While rising energy prices have contributed meaningfully to higher inflation, the firm said that these price changes were supply driven and a short supply of oil and gas was not expected in the medium to long term.
The firm also expects ongoing broader supply chain issues due to new variants of COVID-19 will begin to ease in the coming months.
“The inflation debate is complex, but the foundation for rising prices lies partly in the rebuilding of consumer balance sheets during an extended period of lockdown,” said T. Rowe Price equity division portfolio specialist Laurence Taylor.
“In combination with heavy fiscal stimulus during this period, this has created the foundation for an outpouring of consumption.”
Potential risks to the firm’s forecasts for fading inflation in the coming quarters include the rise of new COVID-19 variants and China’s policy on Omicron, according to Mr Taylor.
“China’s response to a variant of COVID that is much harder to control and the resultant impact on the economy is an important data point for the global supply chain, which we will continue to observe in the near future,” he said.
T. Rowe Price has also predicted that fading inflation will coincide with rising interest rates.
“Central banks are currently trying to balance the need to support economies with a growing need to bring up the cost of money, which has been abnormally distorted by COVID-19,” Mr Taylor said.
“In short, this is the lift-off point for interest rates out of necessity, as letting inflation and speculation run out of control is not a good option. But recovery is still in its early stages and dramatic increases in rates will likely disrupt the improvement pattern and unduly stress balance sheets somewhere in the global financial system.”
