Three key consequences of high inflation variability – Natixis

Economists at Natixis believe that the energy transition since it is carried out primarily on the supply side will lead to high variability in energy prices and in inflation. What would be the consequences of high inflation variability? High variability in real wages, high variability in real interest rates and strong demand for inflation hedges and to higher term premia.

Towards high variability in inflation and therefore in the economy

“We believe that, structurally, inflation variability will be high in OECD countries (we look at the US and the eurozone) since, during the energy transition, the supply of fossil fuels may fall faster than demand for fossil fuels, leading to periodic sharp increases in energy prices.”

“If inflation has high variability, real wages will also have high variability. If the variability in real wages is persistently high, this will also be the case for the variability in consumption and GDP.”

“Inflation variability leads to variability in real interest rates and therefore in asset prices (equities, real estate). We have just seen that the sharp rise in inflation has driven down real interest rates sharply and driven up share prices and real estate prices.”

“Holders of nominal bonds (those paying a fixed nominal interest rate) are the losers from inflation variability. They will therefore try to hedge against inflation risk, which will drive up inflation risk premia. If central banks are expected to react to inflation, higher inflation variability also leads to increased term premia and steeper yield curves.”