Beyond this, some of the powerful forces that have eroded inflation over the past 40 years remain in place.
• Trade union membership continues to decline with just 10.3% of employees being members of unions in 2021, down from 10.8% in 2020 and over 20% in the early 1980s.
• Information technology continues to make it easier for consumers to find the cheapest price for goods and services—a trend that the pandemic will likely only accelerate in the long run, and,
• As the surge in pandemic assistance to low and middle-income households abates, the effects of income inequality are likely to reassert themselves, reducing the demand for goods and services while increasing the demand for financial assets.
In short, while inflation won’t die out quickly without a recession, it should gradually drift down. If this is the case, the Federal Reserve should have the patience to let it do so rather than try to speed its decline at the risk of tipping the economy into recession.
Ultimately, we think this is what the Fed will do and so, after some pretty hawkish signals in recent months, their tone could turn a little softer as the year goes on. For investors, this suggests that there is no need to panic, despite sharp recent increases in long-term interest rates and Friday’s plunge in U.S. stocks. Rather it is a time to check the valuation of assets more carefully as the U.S. and global economies transition to more normal economic growth but somewhat higher inflation that was seen in the decade before the pandemic.
David Kelly is chief global strategist at JPMorgan Funds. Stephanie Aliaga is a research analyst at JPMorgan Funds.