The global economy is in a stagflationary environment. This is new for all groups: Uncertainty for consumers, companies, states (including central banks) and market participants has increased significantly. Long-established relationships between economic parameters (growth, unemployment rate, inflation, interest rates, securities prices) have been called into question. The situation is exacerbated by the effects of the war in Ukraine, which threaten fundamental aspects such as energy and food security, peace, social stability and the geopolitical world order. It is likely that the phase of low macroeconomic volatility ("Great Moderation") established in the past decades has come to an end for the foreseeable future.
Market participants are looking for a new strategy TINA (" there is no alternative to risk assets") no longer applies. The prices of risky security classes are currently exposed to downward pressure. Both theoretical channels of action are at work here: First, the discount rate is rising because both credit risk-free yields and the risk premium are rising. Second, the prospect of falling earnings growth also increases. The underlying driving factor here is inflation.
Inflation spiral risk
Inflation rates are surprisingly high. In times of low inflation, companies and consumers naturally worried little about inflation. However, as inflation continues to rise, trend inflation could eventually reach a level at which inflation expectations also start to rise sustainably - an inflation spiral would be the result. This describes a scenario in which the rate of price increases remains high because this is what consumers and companies expect.
Central banks can have little influence on current inflation. However, they can try to dampen demand, which would require positive real interest rates. The key question is what inflation rate to calculate with. With a high rate, because an inflationary spiral is likely, or with a low rate, because it can be prevented.