This restricts the supply of labour in the market, driving companies' costs higher, and only those companies that have pricing power would be able to pass those higher costs on.
In this scenario, the economy could develop into a situation of 'stagflation', where inflation remains persistently high, but economic growth does not come through. This mirrors the economy of the 1970s, and would imply either persistently higher inflation keeping growth lower, or companies being unable to pass on their higher costs to consumers, leading to reduced profits. In such a climate, the more cyclical type of equities would not perform well.
Lagarias says this is not the outcome he regards as the most probable, while De Lislesays governments have made the decision to prioritisegrowth rather than inflation, which is the opposite to the path taken at the end of the 1970s, when reducing inflation was viewed as the priority.
So the likelihood is, we end up with demand-side inflation, which boosts value stocks.
David Thorpe is special projects editor at FTAdviser
