From the 2008 financial crisis to the rise of populism and deglobalisation, markets have often made the mistake of thinking that the world would not change.
This has very often been driven by a failure to account for political and social forces, as well as just economic ones.
And I fear we are in danger of making the same mistake again when it comes to inflation, given the reaction of central banks and the market.
Advisers must be careful not to be caught out.
This year has begun with a renewed sense of optimism about the inflationary picture in Europe and the US.
The market, despite some recent setbacks, is still predicting significant cuts in interest rates in the US, Europe and, to a lesser extent, the UK.
Central banks have also been striking a notably more positive tone in their messaging with regard to rate cuts, but have been pushing back on timing.
Inflationary pressures
There is no doubt that the picture has improved considerably in the past 12 months and there are disinflationary forces at work.
For example, supply chains in most sectors have normalised following the shock of Covid-19.
Commodity prices, which hit near record highs after Russia’s invasion of Ukraine, have come down substantially.
Europe has also successfully weaned itself off Russian gas in a far shorter time frame than many were predicting two years ago.
These are all hugely positive steps and should be welcomed.
It is also likely that these improvements in conditions will lead to some cuts in the near term, especially in the Eurozone, where inflation does appear to be less sticky than in the UK and US.
The problem is that no one can explain when and how conditions will improve sufficiently for the substantial rate cuts that the markets are predicting.
And even if we do see near to medium-term cuts to the extent markets believe, economic and political volatility combined with structural pressures mean we need to get used to periods of high, and in some cases sustained, inflation, which will force central banks to keep rates elevated for potentially longer than the market is pricing in.
First, we need to remember that inflation is still above the 2 per cent target many central banks have in place.
Unless we suddenly see a major drop to closer to the 2 per cent target central banks will have to hold rates at their current levels for longer.
The world is currently more unstable than at any time since the cold war and arguably since 1945, which has resulted in a number of conflicts across the globe.
The latest pressure on global supply chains, namely the disruption to shipping in the Red Sea, is a direct consequence of these increased hostilities and an example of how geopolitical pressures can very quickly and unexpectedly translate into inflationary ones.
