Inflation is back, geopolitical expert tells investors

Inflation is back and it will cause geopolitical risk to rise, according to a leading expert and former adviser to US president George W Bush, Pippa Malmgren, who is currently advising the UK government on Brexit, as well as advising a number of pension funds and sovereign wealth funds.

Malmgren told an audience of investment executives in London recently that the difference between inflation at 1% and 2.5% was huge for ordinary consumers. She added: “At investment conferences the speakers often talk about the death of inflation on the stage, but later in the bar, people talk about how prices are rising in their daily lives; there is a gap between stated inflation and what is actually happening.” She added that the global economy had enjoyed a long period of low inflation since the fall of the Berlin Wall in 1989, which had depressed inflation, by massively increasing the global workforce. In addition, the peace dividend has now been replaced by a conflict premium, as countries such as Russia, North Korea and China have grown more aggressive. Malmgren said that these changes have profound implications for the investment industry and active managers in particular. “If you are using old frameworks to look at a new world, you are going to miss things. The biggest danger today is that active managers are still in the old mindset,” she commented.

In a whistle-stop tour of potential global trouble spots, Malmgren said that Sweden has recently brought back conscription, Russia is due to hold a major military exercise close to the Poland-Lithuania border, there has been a nose-to-nose stand-off between China and India in the Himalayas, while North Korea and the US are heading towards nuclear brinksmanship. She added that North Korea’s neighbours are terrified that if the regime there falls, there could be a mass exodus of refugees.

Malmgren stated that a rise in inflation will threaten the social contract between citizens and governments. “Citizens work, pay taxes and obey laws because governments protect and provide for them, and keep food and energy affordable. When people think that government is not delivering its side of the contract to keep prices under control, they demand more money, or social unrest starts. I look at price of corn in Mexico, price of wheat in the Middle East – that is what matters to people.”

She added that another major geopolitical issue was the success of China’s belt and road initiative, which involves vast spending on physical infrastructure in central Asia and the Middle East. This aims to create more demand for Chinese goods and to secure supplies of raw materials, but Malmgren warned: “If there is an economic slowdown in China, it could be existential threat to China.”