Burkhard Varnholt on Why Inflation Should Remain Benign
In spite of recent inflation jitters, there is good reason to believe that inflation will remain benign.
Last year, the Deputy Chief Investment Officer at Credit Suisse, Burkhard Varnholt, said that inflation had been killed by Jeff Bezos, the founder of Amazon. Nevertheless, inflation jitters have once again unsettled financial markets in recent weeks. Burkhard Varnholt explains why inflation is likely to remain benign.
The internet has strengthened market competition so much that the wiggle room available for companies to increase prices remains very limited, Burkhard Varnholt, Deputy Chief Investment Officer at Credit Suisse, argued last year. This acts as a powerful restraining force on inflation. Recent inflation jitters can more likely be explained as concern about looming salary increases, given the current very low unemployment levels.
Are we on the eve of an inflationary era like we were in the 1970s? Two aspects of the current situation suggest this may not be the case. Firstly, it's true some salaries are rising due to solid economic growth. However, companies are unlikely to be able to pass the resulting higher costs on to the consumer.
Secondly, there is a difference between today's picture and the "toothpaste inflation" of the 70s and 80s. This phenomenon was famously referenced by a president of the German Bundesbank, who explained that "once it is out of the tube, it is hard to get it back in again." In those days, nearly every employee had some kind of inflation indexing in their employment contract. However, these days, salary increases are due to good growth, which is transitory in nature. So while growth remains strong, inflation should stay benign.
Watch last year's video of Burkhard Varnholt saying "The internet has killed inflation."