Investment styles and inflation are correlated. When inflation stays low for a long period of time, the themes that benefit from them are different. When inflation starts rising and remains on the ascendant for longer periods of time, the themes that benefit from them are another set.
Investors globally are used to experiencing low inflation in developed countries. Since the last decade, Indian investors have also experienced falling inflation. We have almost forgotten how an inflationary environment will be. Rising inflation is always seen as a temporary phenomenon. Most central banks show confidence that it would be a passing phase.
Monetary policy has stopped reacting swiftly towards inflation. This approach may not work beyond a point. We could well see inflation demanding decisive central bank intervention. India had last seen in it 2011-2012. The last two years have seen our central banks’ guard drop lower. We have been prioritising growth over inflation management. The coming months will test this approach and we may be forced to act decisively against inflation. When that happens, growth will tend to soften.
With inflation hitting new highs we may see stronger interventions from the US Federal Reserve this year. The RBI’s inflation management will inevitably be tested. Overall, our investing needs to adapt and prepare for an era of rising inflation.