No one is sure why inflation has remained quiescent even as unemployment has fallen. Could there be an unexpected resurgence?
to say precisely when a cherished theory of inflation lost its sway. But if you had to pick a moment, it might be during an exchange last July between Alexandria Ocasio-Cortez, a first-time congresswoman who had risen quickly to prominence, and Jerome Powell of the Federal Reserve.
Inflation clearly does not behave as it used to. It no longer goes up automatically when unemployment goes down. Perhaps this is because people have come to expect low inflation. Wages and prices are marked up less often and so are less responsive to slackness or tightness in the jobs market. Global supply chains mean local bottlenecks have less influence on prices.
A serious burst of inflation would change all that. It would be a sign that the low-interest-rate equilibrium had shifted. That would upset the constellation of high asset prices. For investors with portfolios stuffed with richly priced stocks, there is a strong reason to seek hedges against unexpected inflation. High-quality government bonds are the traditional diversifier for equity risk. But when inflation strikes, long-term nominal bonds are the worst assets to own.
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