Inflation has been more persistent than general market expectations in recent months, as Mr Carpenzano forecast in an earlier podcast in this series. “The good news is that inflation is probably starting to decelerate in developed and emerging markets,” he says. “But the big question is how long this process will take.”
With the risk that rising inflation and interest rate hikes will contribute to economic recession, Mr Carpenzano discusses how central banks may react to this concern. He also considers when interest rates could start to fall, whether central banks will continue to target 2% annual inflation, how different economic scenarios may affect investment prospects, and when the economic environment is likely to stabilise.
Of course, there are no easy answers, with governments and central banks under pressure to achieve a fine balancing act of calming inflation while avoiding curtailment of economic growth. The podcast also investigates the potential policy mix and the related trade-offs that may be made by fiscal and monetary policymakers.
A key question for the coming months is the extent to which central banks can remain truly independent of governments. Politicians are under pressure from voters to deliver growth and keep state budget deficits under control, which may lead them to lean on bank governors in an attempt to keep interest rates looser than otherwise planned. Mr Carpenzano explains why he believes this may ultimately be an ineffective long-term strategy for inflation and growth.
He ends the podcast by explaining the relevance of this for bond investors, offering a relatively upbeat assessment for the asset class, set against various potential long- and short-term scenarios for growth, inflation and general market volatility.
This episode is part of the second season of the “Investing for the long term” podcasts series featuring Capital Group. These monthly podcasts, produced and hosted by Delano and Paperjam, explain some of the key challenges investors are facing and the investment opportunities related to those challenges.
The first series can be accessed here.
To listen to Capital Group’s podcasts, click here.