The last 40 years have been defined by lower inflation, creating a generous tailwind for fixed income. Now, AllianceBernstein believes that we are in the midst of a transition to a new regime that will feature lower growth and higher inflation. In this environment, the firm believes that fixed income investors need to make appropriate adjustments. 

It believes that inflation will be structurally higher in the coming decades due to deglobalization and demographics. Deglobalization means that supply chains will be reshored, undoing some of the deflationary trends of the last 40 years, and it will result in higher inflation due to greater manufacturing costs and wages. With an aging population, there is a smaller pool of available workers, which will also contribute to inflationary pressures. Both deglobalization and demographic trends will weigh on economic growth as well. 

Due to these factors, AllianceBernstein forecasts that 2% inflation is now the lower bound rather than a target. It believes that frequent spikes in inflation, as experienced from 2021 to 2022, will also become commonplace. This is a consequence of governments with large amounts of debt and future liabilities. Policymakers will be incentivized to ‘inflate’ away the debt rather than make painful cuts to spending. Additionally, lower rates will help contain financing costs.

Finsum: The last 40 years were great for fixed income due to inflation trending lower along with interest rates. AllianceBernstein believes this era is over, and we are moving into a new period defined by lower growth and higher inflation.