For a good portion of the early 2020s, just about every discussion of financial markets seemed to involve aviation metaphors. Rich-world inflation had surged and central bankers had belatedly ratcheted up interest rates in an attempt to cool their economies.
The big question was whether they could accomplish this without crashing into recession. Overdo the monetary tightening, and productive activity would be squeezed out of the economy along with inflation: a “hard landing”. Those who got it just right would be rewarded with a “soft landing”, in which inflation faded but the economy avoided a downturn. History, alas, showed hard landings to be much more frequent than soft ones.
Anyone proposing a third scenario — “no landing”, in which both inflation and growth kept running hot — could expect short shrift from central bankers. Buttonwood himself has made half a dozen bristle by asking if they might allow such a thing.
The milder types reminded him that their institutions had been given inflation targets by their governments and took them very seriously. The more irritable offered (marginally) politer versions of: “How stupid and/or irresponsible do you think we are?”
Fast forward to today, however, and it looks suspiciously as if the world’s most important central bank has indeed opted for perpetual flight.
The US Federal Reserve’s preferred measure of American inflation never did fall to its 2 per cent target, bottoming out at 2.3 per cent over the 12 months to April 2025. The latest reading, for May, was 4.1 per cent. Prices have risen almost as quickly in Australia (4 per cent) and are also still outstripping targets in Britain and the euro area (both 2.8 per cent).
Both investors and consumers expect above-target inflation to persist. In Bank of America’s most recent monthly survey of fund managers, 54 per cent of those taking part expected “no landing” for the global economy in the coming 12 months. In the University of Michigan’s latest survey of American consumers, the median respondent expected inflation of 4.2 per cent over the next year.
The rise in energy prices since February, when America and Israel began to bomb Iran, has worsened matters. But the bigger problem is that inflation has not been below 2 per cent since early 2021. The University of Michigan’s respondents now expect it to average more than 3 per cent over the long run.
So what are the past five years’ lessons on investing amid high inflation? The main one, unsurprisingly, is that claims on real assets and income streams are worth paying for.
China aside, all of the world’s biggest stock markets have fared somewhere between reasonably well and spectacularly since consumer prices took off in 2021.
Part of that is due to surprisingly fast earnings growth; another, linked, part to even faster progress in artificial intelligence. Even in their absence, though, shares would still have represented claims on real earnings that rise along with other prices, protecting their value from inflationary erosion.
By similar reasoning, bonds — most of which promise only nominal payments — have given their investors a lousy half-decade. A Bloomberg index of American Treasuries has lost about 20 per cent of its real value. Most of the hit came from inflation’s corrosive effect on fixed-dollar coupon and principal payments; the rest from rising yields, which force down the prices of existing bonds.
Should today’s bondholders fear future inflationary surges, they will demand even higher yields in compensation, inflicting the same double-whammy again.
The final lesson is that inflation sends even those assets which outpace it over the long run on a wild ride. Gold, the classic debasement hedge, has lost nearly a quarter of its market value since a peak in January.
Though inflation has persisted, investors worry that a previous mania for the metal — sparked by those trying to inflation-proof their portfolios — has put it in a bubble. In 2022 the prices of shares and commercial property tanked along with those of bonds, because of worries about the effects of sharply higher interest rates.
The no-landing world is a less stable one because high inflation does not just devalue currencies. It prompts investors and consumers to behave more erratically, creating their own volatility. For just this reason, it was common a few years ago to hear that the no-landing scenario was in truth an intermediate one: the flight would be so bumpy that the plane would have to land eventually.
Whatever you think of this logic, such talk has long since died down. So, at least for now, enjoy the flight.