Further inflation scares in the coming months that drive any bond selloff should be seen as a buying opportunity. Our analysis suggests that the secular disinflationary headwinds of the past few decades will ultimately prove more lasting than a rise in prices due to temporary supply shortages.
Supply chain disruptions are widespread in everything from semiconductors to lumber, contributing to fears that higher inflation is on the way. These disruptions are being exacerbated by surging demand as the economy reopens and fiscal policy provides a strong tailwind for consumption.
While these supply issues may be a near term challenge, investors need to realize that these types of price pressures, typical in an economic rebound, are more like one-off adjustments than the kind of sustained inflation that would prompt the Federal Reserve (Fed) to react. The Fed has repeatedly referred to the coming inflation as transitory, so it is really 2022 inflation that will drive monetary policy.
Several factors suggest inflation will slow by next year. As the chart below shows, higher prices from supply bottlenecks in the manufacturing sector are typically short-lived. High prices and an improving COVID situation will bring more capacity online by the end of 2021, in turn dampening inflation pressure next year.
Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility.
Basis point – One basis point is equal to 0.01 percent.
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