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  • Investors should get used to Thursday’s hot CPI report after more than a decade of sub-2% inflation readings, according to Bank of America.
  • The bank highlighted years of underinvestment in energy production, sticky wages, and aging demographics as reasons to believe inflation will be higher for longer.
  • “It takes an average of 10 years for a developed economy to return to 2% inflation [once] the 5% threshold is breached,” BofA said.

Thursday’s higher-than-expected CPI report was a sober reminder to investors that it’s going to take some time for elevated inflation readings to cool off.

Prices rose 8.2% year-over-year in the month of September, ahead of expectations for an 8.1% increase. Prices jumped 0.4% month-over-month, which was double the estimate for just a 0.2% increase. The increase happened despite the Fed’s five rate hikes so far this year, including three consecutive increases of 75 basis points.

And according to a Wednesday note from Bank of America, high inflation reports could become the norm after more than a decade of sub-2% inflation readings.

That’s because underinvestment in energy production, sticky wage inflation, and aging demographics are set to drive structural inflation for years to come.

“Historically, it takes an average of 10 years for a developed economy to return to 2% inflation [once] the 5% threshold is breached,” BofA said. And the Fed’s aggressive interest rate hikes are likely to have little impact on inflation as much of the issues are on the supply side rather than the demand side. 

Here’s why higher inflation is likely to stick around for longer than most expect, according to BofA.

1. ‘Wage inflation is stick and Baby Boomers aren’t returning to work’

“US wage growth for non-managers reached 6% earlier this year for the first time in 45 years and is running at 5.8%. The sub-3% wage growth of the past two decades looks like the outlier as wage dynamics are starting to mirror the 20th century,” BofA said.

The bank expects labor supply to remain tight for the foreseeable future as about 1 million workers aged 55 and above stay on the sidelines, perhaps permanently after the COVID-19 pandemic. That should put additional upward pressure on wages. 

2. ‘A decade of underinvestment in energy = higher input costs’

“Annual oil and gas investment has fallen well below $500 billion after peaking at $750 billion in the mid-2010s. Malinvestment in relatively inefficient, diffuse, expensive, and unready energy sources (wind and solar) left Europe exposed to the whims of an adversary, substantially contributing to the outbreak of global inflation,” BofA explained.

The bank expects oil prices to average $100 per barrel next year, which would imply input prices being 40% higher than the past decade, adding to cost pressures.

3. ‘De-globalization and aging demographics = future inflation’

“Wage pressures and higher energy costs can be mitigated by policy in the short to medium-term. Structural shifts in de-globalization and aging societies are more difficult to change,” BofA said.

“Aging has been one of the strongest deflationary forces of the last 30 to 40 years. It will become inflationary in the next 30-40 years as the pool of workers supporting dependents shrinks. According to the UN, US dependency ratios bottomed in 2010 and could reach all-time highs in the next 40 years, suggesting upside risks to inflation over the long term.”

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