He says this will mean inflation rises for a prolonged period, and his response has been to sell his growth stocks and buy value.
Different types of inflation
Inflation generally comes in two forms: from the supply side or from the demand side. Supply-side inflation is often called cost-push inflation by economists, while inflation from the demand side is called demand-pull inflation.
The former happens when the cost of bringing goods and services to the market rises, while the latter occurs when demand for goods and services rises at a faster rate than the increase in the supply of goods and services.
The pandemic led to lockdowns around the world, which led to a severe collapse in demand-side inflation as people were simply unable to make some of their usual purchases.
As economies reopen, those purchases get made and inflation rises, particularly as enforced savings from lockdowns are deployed. But the shutdown of economies also had an impact on the supply side.
This is, for example, because makers of semiconductors cut production in anticipation of a prolonged fall in demand, while the oil price briefly dipped into negative territory at the pandemic’s height, and production slowed.
Lagarias says he is “not worried about supply-side inflation on its own”, as typically supply-side inflation is easier to control because when companies see demand rising, they adjust by increasing supply. While this takes time, it does mean that it is transitory in nature.
Richard de Lisle, who runs the VT De Lisle America fund, says: “Supply-side inflation is not the scary one. Bottlenecks are bigger than normal because of enforced changes in behaviour. The scary one is demand-side inflation as it is much more difficult to control.”
Outgoing BoE chief economist Andy Haldane recently described trying to control demand-side inflation as being akin to trying to hold a tiger by the tail, noting: "This tiger has been stirred by the extraordinary events and policy actions of the past 12 months."
The central bank currently expects consumers to swiftly spend about 10 per cent of their accumulated savings. The latest BoE data shows retail sales in April were 10 per cent above pre-pandemic levels, with clothing sales back to pre-pandemic levels.
In its most recent inflation update, the Office for National Statistics said that while inflation as a whole rose by 1.5 per cent in the year to the end of April, input costs were 9.9 per cent higher.
In a webinar last week, Philip Lane, chief economist at the European Central Bank, said that higher input costs will not lead to longer-term higher inflation.
Gero Jung, chief economist at Mirabaud Asset Management, says the risk of supply-side inflation could come from issues in the labour market. He says with furlough schemes and exceptionally high social security benefits paid as emergency measures during the pandemic, many people may not be better off not taking a job at this stage.
