Macquarie Capital strategist Viktor Shvets was one of the first to argue that pandemic-induced inflation would rapidly turn into disinflation.
Drawing on the historic parallel of the 1918 Spanish Flu, Shvets posited that an initial bout of higher prices would turn into a deflationary bust as authorities over-corrected in their attempt to tame inflation and tamp down demand. At a time when many were using a very different analogy — that of the 1970s period of stubbornly high inflation — Shvets’s prediction stood out.
Disruption from the Spanish Flu — still the second-deadliest pandemic in human history — initially caused prices to jump as the epidemic took hold. But that inflationary spike was soon followed by period of deflation with double-digit negative CPI in 1921, after authorities rushed to tighten policy.
Flash forward to 2022 and while inflationary pressures obviously haven’t dissipated just yet, the idea of slower economic growth is rapidly becoming the base case in markets, with even the most optimistic of macro analysts turning more cautious in recent days.
You can see the shift in market expectations in the prices for inflation-linked bonds, with the five-year five-year forward breakeven firmly back at pre-pandemic levels.