Time to dust down those inflation slide rules
Inflation differentials between countries are returning and investment analysts will reinvent the technology for weighing them. First in the balance will be the US whose assets look set to weigh light against those of Europe and Japan
Since I was a junior analyst at JP Morgan at the dawn of international investing, inflation has been on the way down everywhere. Not only did disinflation mean lower inflation in every successive period, it also meant different countries' inflation rates converged.
Disinflation was achieved by tight monetary policy and fiscal discipline. All that is over. Now the world is moving towards lower annual growth of 3% and medium-level inflation of 3%. This 3x3 world is flanked by the dangers of rising inflation expectations on one side and deflation on the other. That prompts more asset price volatility as outcomes are disputed.
Ranking by rising prices
In my JP Morgan days, we spent a lot of time debating relative national inflation rates and rankings. Getting it right meant getting currencies and real returns to investors right too. Of all the asset allocation tools we used, the simplest and best was the ranking of countries by relative inflation performance. All that disappeared as an investment variable during the disinflationary period. Now it will come back with a vengeance. We will see, though, widely divergent inflation, growth and currency changes.
Let's start with the simple things the US brands and uses but doesn't make.