When temporary turns permanent

It is increasingly clear that changes wrought by the pandemic will prove long-lasting. That applies to both the structure of consumer demand, price formation and the appropriate policy responses. Part of the problem is that the memory of recession is far more lucid than the burn from wealth-sapping inflation. Furthermore, economic models are naturally backward looking, so struggle to adapt to rapid change. A moderation of inflation will remain policy-makers’ base-case and hikes will be delivered later than needed. It is an environment in which we should see upward pressure on bond yields. That makes it hostile for risk assets, including equities.

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