From NICE to VILE—The Future of Inflation

After the recent surge in inflation blindsided many investors, they are keen to avoid similar shocks going forward. Hence, this paper explores the type of inflationary environment that we might expect across developed markets in the future and its potential effect on global asset prices.

Investors’ inflation surprise arrived after a series of distinct inflation regimes. The recent experience of excessively high global inflation looks radically different compared to the so-called NICE decade—Non-Inflationary, Consistent Expansion—that predated the global financial crisis of 2008/09. And it stands in even sharper contrast to the recently concluded period of “too-low” inflation that came after.

Considering these developments, should we expect a return to the benign inflation environment of the last several decades? Or should we expect a world that is better described as VILE—Volatile Inflation, Less Expansionary?

Surely, it’s a complex question that aligns with a global paradigm rife with complexities. Therefore, in an attempt to organize our views, we consider how changes in inflation targets, relative price shocks, and relative price trends may affect the pricing dynamics to come. Each of the three factors carry important consequences for inflation and the horizon over which central banks can steer inflation back to target—that is, the future inflation regime.

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