Inflation poses risks for Private Equity but policy backdrop should continue to be supportive

capital economics

As countries re-open and energy prices recover from last year’s sharp falls, developed and emerging economies alike are facing a huge spike in prices. According to Bank of America Merill Lynch’s widely followed survey of global fund managers, inflation is now considered to be the greatest “tail risk” to markets, even more so than COVID-19 itself, or the asset price bubbles for that matter.  

Are fund managers right to be so concerned?

Indeed, commodity prices are still on an upward trend and supply shortages continue to afflict manufacturers.  Inflationary pressures are compounded by unprecedented levels of policy stimulus in the wake of the pandemic and a greater tolerance of higher inflation by policymakers. With this in mind, it’s well worth conducting a deeper analysis of the market to understand if we are headed towards a Great inflation 2.0, along the lines of the high-inflation-riddled decade of the 1970s.

To answer this question we asked one of the leading independent economic research firms, Capital Economics, to undertake an analysis of the impact of inflation on private equity, considering that price rises are continuing to exert pressure on markets, as pandemic-induced temporary supply bottlenecks persist across the global economy.

This opinion piece takes a deep dive into the potential risk of inflationary pressures in key jurisdictions, how central banks are expected to respond to the rising risk of inflation, as well as how rising inflation could impact private equity performance.

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