I feel a little sorry for the people who write these research papers. They have worked tremendously hard over many months to produce excellent analysis on the nature of inflation and how to think about it, and then they publish their work just at the point when the focus of the world's attention has pivoted to the disinflationary impacts of a dislocation in the US regional banking system.

To be honest, late or not, the work is worth a read. It's never inappropriate to think about inflation risk... because major inflation surprises, however improbable, tend to have wide ranging consequences for the way investors allocate capital.

These inflation notes have been penned by the BIS and economists at UMass Amherst. They are definitely up there in terms of quant/nerd factor, but the narrative around the quants/data is, IMHO, really quite interesting particularly in the 'sellers inflation' piece. The papers are linked here:

My interpretation of what I read is that inflation 'shocks' are typically initiated by a wider (unexpected) geopolitical or commodity price shock - they percolate through margins into prices and ultimately reach wages where the net impact depends on labour capacity. A single shock on its own might cause a one off adjustment in the price level and change future wage growth expectations marginally, particularly without an appropriate policy response, but several shocks 'daisy-chaining' together over a period of years (as they did on a grand scale in the 1970s) can outrun monetary policy and this may cause wage and price inflation to become more persistent . This is the 'regime change' that the BIS identify. When this happens monetary policy and markets can get pretty 'wild' (I guess this why so many are now convinced that Powell is Volcker reincarnated - BTW as an econ historian I am a big fan of PV - all 6'7 of him - met him once and have an accompanying story).

In Europe, after such a long period of very low inflation and zero rates, these risks and uncertainties weigh somewhat heavily (as the FT pointed out yesterday), but the different trades offs that inflation risks present us with are clearly at the centre of why investors are still allocating capital to the sector. Yes the market is levered and yield spreads to rates and fixed income might be tight today, but leverage is no where near where it was last time around and if the economy slows the spread might be wider tomorrow. Equally if rates stay elevated the appeal of stable indexing cashflows remains. As we said in a research piece in 2017, our sector is rate sensitive and leverage risk needs to be carefully controlled, but the asset class is also has some inflation optionality. Investors that steer their capital into the right parts of the market (those parts where long term pricing power is strong) and take the right risks should be able to benefit from the optionality and sleep more comfortably at night.

I will leave you in peace to read these wonderful tomes and ponder the ideas at your leisure. As always if you want to discuss inflation, disinflation, credit and asset allocations in more depth please reach out - I am always up for a chat!

Simon Martin