The View | Why inflation, not pandemic recovery, is likely to be the biggest story for investors in 2022

As pandemic-inspired price rises ripple through economies worldwide, the focus is shifting to supply chains, money supply and slowing growth

With classical finance all but useless, the need to identify stories in modern finance has never been so important

Reading Time:3 minutes

A woman checks pickled food at a supermarket in Moscow on December 15. Price rises are already rippling through economies. Photo: AFP

Published: 9:15am, 31 Dec 2021

Over the past three years, I have been pursuing doctoral research in narrative finance – the study of how stories move markets. It is a new topic for academic study, even though we have known for centuries that stories move prices. Even so, it is now timely, as the need for identifying stories in modern finance has never been so important.

This is because classical finance – the aspect of the discipline that gave us powerful valuation metrics such as price-to-earnings ratios, cash flow statistics and other forms of higher mathematics – is now all but useless. Most of those metrics are based on relative relationships, which depend on the goalposts remaining in the same place.

The last new financial markets paradigm was in 1971, when the United States went off the gold standard. This made central banks, rather than gold, responsible for the strength of money and the custodians of low inflation.

Years of weak leadership by global central banks has meant interest rate policy has been excessively low for 25 to 30 years. This has placed the goalposts on the other side of town and well beyond the remembrance of most investors.

Central bankers would say in response that they have kept inflation low. This ignores the huge deflationary impact of fudged data, the technology revolution and China’s development into the world’s factory.

Those exogenous advantages are over. Inflation is likely to be the biggest single narrative for 2022 as pandemic-inspired price rises ripple through economies, driving advance purchases and eventually big pay rises.

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.css-1m2rp1p{color:#34b8b5;}The View | Why inflation, not pandemic recovery, is likely to be the biggest story for investors in 2022

The View | Why inflation, not pandemic recovery, is likely to be the biggest story for investors in 2022