Introduction and aims
After a prolonged era of cheap money and double-digit returns, the sharp spike in inflation to its 40-year high in 2022 was a game changer.
That the Goldilocks scenario of moderate growth and low inflation has been rudely interrupted of late is not in doubt; nor, for that matter, is central banks’ resolve to tame the current inflationary spiral. In the rich world, they are now walking a perilous tight rope, after virtually abolishing risk pricing in capital markets over the last 12 years. The scope for policy mis-steps now is enormous as central banks seek to pull off the highly desirable ‘soft landing’ that minimises both inflation and recession risks at the same time.
For pension plans, with their long planning horizons and multi-decade liabilities, there are too many open-ended and unknowable risks. The immediate one is whether central banks are actually able to arrest the current inflationary spiral and ensure that inflation expectations remain anchored to their policy targets. Another question is how central banks would react if inflation started to come down but then persisted well above policy rates as unemployment started to rise.