Inflation has been top of mind for investors throughout 2021, as a combination of supply chain disruptions and pent up demand have led to higher prices throughout the economy. The question going forward is whether these increases are transitory or permanent. In our view, the risk of sustained inflation is higher now than at any point in recent memory, and we believe that fixed income investors should adopt a defensive posture.

What Is Inflation?

The concept of inflation has evolved over time and is now generally understood to measure price changes for goods and services that are consumed – the inflation that impacts our day-to-day budgets and “feels bad.”

Importantly, increases in asset values such as home prices and equity prices are not considered in official inflation calculations. So, although one could argue that the dotcom boom of the late 1990s and the housing boom of the 2000s were both inflationary episodes, neither factored into the published numbers. These types of inflation are typically dismissed as asset bubbles, with little thought given to how they might add inflationary pressure to the broader economy.

Whether this is the right way to measure inflation and guide policy is a worthy debate topic, but is not the subject here – which is to evaluate the current “feel bad” inflation and assess whether it is transitory or persistent.

How Is Inflation Measured?

One of the trickiest aspects of inflation is that it is difficult to quantify, as the U.S. economy is both vast and complex. No single measure is able to capture price changes across such a diverse, dynamic landscape.