Macroscope | Investor fears of stagflation risk turning into a self-fulfilling prophecy
- The narrative of a return to high prices and low growth may appeal to markets spooked by a supply chain crisis and China’s growth scare, but it’s not supported by current economic conditions
Financial market commentators and investors love to pin tidy narratives to confusing shifts in the economy and asset prices. Stories matter hugely in markets, mainly because it is easier for traders and analysts to make sense of complex data by turning them into a compelling narrative.
More worryingly, it has become a popular search topic on the internet. Globally, searches for the word “stagflation” on Google Trends are at their highest level since 2008, and are particularly high in Britain, where the term originated and where the current supply chain crisis is most acute.
The speed at which the threat of stagflation has risen to the top of investors’ concerns is striking. As recently as July, nearly half the respondents to Bank of America’s monthly fund manager survey expected global growth to continue to improve.
The publication on Tuesday of the latest poll revealed that the net percentage of respondents anticipating a stronger economy had turned negative for the first time since the eruption of the Covid-19 pandemic. What is more, 38 per cent of respondents believed higher inflation was permanent, up from 23 per cent in June.