Macro Observations series · Part 5. Behind interest rates and currencies stands a more fundamental variable – inflation. It determines central banks' stance, the neutral rate, and the very character of an era. This piece unpacks it, and the regime shift that may be underway.
I. A Century-Level Misjudgment: 'Transitory'
To talk about inflation, you have to start with that famous 2021 call – 'transitory.'
In 2021, when inflation started to creep up, the Fed and most mainstream economists judged it a 'temporary' phenomenon driven by post-pandemic supply-chain disruptions that would quickly fade. Based on that, they delayed action.
The result was catastrophic. Inflation didn't just fail to fade – it surged to a 40-year high, forcing the Fed into the fastest rate-hiking cycle in history (remember the interest-rate piece – that regime change). The 'transitory' narrative became the most painful central-bank misjudgment of this generation.
This mistake matters far beyond 'central banks can err.' It forces everyone to rethink a fundamental question – was the three-decade-old world where low inflation was a given actually a special period of history, not a permanent norm? And if so, is it ending?
To answer that, we must first recognize that inflation has two very different faces.
II. Two Faces of Inflation: Cyclical vs. Structural
People often treat inflation as one thing, but it has two faces. Distinguishing them is key to understanding the problem.
First face: Cyclical inflation (demand-driven). This type follows the business cycle – when the economy overheats and demand is strong, prices rise; when the economy cools and demand weakens, inflation falls. It's thermometer-like, moving with hot and cold, coming and going. Central bank rate moves are mainly designed to manage this cyclical inflation. This face is familiar and relatively manageable – it ebbs and flows, eventually mean-reverting.
Second face: Structural inflation (supply-driven). This does not come from demand heat but from deep structural changes on the supply side – the cost of producing something is systematically and durably raised by long-term, structural forces. It's not a thermometer; it's a shift in the baseline. It doesn't easily revert with the cycle because its roots are structural, not cyclical. This face is more hidden and much harder to deal with – you can't 'fix' it by raising rates, because the problem isn't excess demand, but a changed cost structure of supply.
The fundamental error of 'transitory' was mistaking an inflation event with a structural component for a purely cyclical (temporary) one. They thought it was a thermometer fluctuation that would self-correct, but a significant part was a baseline shift that was never going to reverse on its own.
This brings us to the real question this piece wants to discuss, and the most important one for the future – are we entering an era of a structurally higher inflation baseline? My judgment: several powerful structural forces are systematically lifting the inflation floor.
III. The Structural Forces Lifting the Inflation Floor
To understand why the inflation baseline may shift up, we first need to understand how the 'lowflation paradise' of the past 30 years (roughly 1990–2020) was built – it wasn't a given, but the result of several powerful deflationary forces working together. Now, those forces are reversing one by one.
First, Deglobalization: The End of the Great Moderation. The single biggest driver of low inflation over the past three decades was globalization – especially China joining the global division of labor, exporting massive quantities of cheap goods and labor to the world, a huge and sustained deflationary force (driving down global production costs). Now, that force is reversing: trade frictions, tariffs, supply-chain 'de-risking,' reshoring, friend-shoring... Globalization is receding, and the flip side of that retreat is rising costs. When production moves from 'the cheapest place in the world' back to 'a more expensive but safer place,' the cost structure of goods is systematically raised. Globalization used to export deflation; now deglobalization exports inflation – this is the most important force lifting the inflation baseline.
Second, Demographics: From Labor Surplus to Scarcity. For decades, the global labor supply was abundant (baby boomers, the influx of workers from China and emerging markets). But now, major economies are aging, the working-age population is growing slower or even shrinking. Labor is moving from 'surplus' to 'scarcity,' meaning structural upward pressure on wages – and wages are the core cost of services inflation. Demographics, a slow variable, act as a long-term structural inflationary force.
Third, Energy Transition: 'Greenflation'. The energy transition is necessary, but it has an underestimated side effect during the transition – 'greenflation.' On one hand, the transition requires massive capital spending (building grids, storage, renewables), and those costs get passed through to prices. On the other hand, before renewables fully take over, traditional fossil fuels – starved of investment and capital markets' favor – may face constrained supply and be prone to price spikes. The transition period is one of structurally higher energy costs.
Fourth, AI and Data-Center Electricity Demand. This directly connects to my industry research series – AI data centers are 'energy hogs.' Their immense, concentrated electricity demand is colliding with an already strained grid (remember the compute-stack value migration piece). When AI turns electricity into a strategically scarce resource, it becomes another structural upward pressure on energy/power prices. Technological progress is supposed to be deflationary (more on this later), but at its infrastructure stage, AI paradoxically becomes a force pushing energy inflation higher.
Fifth, Fiscal Deficit (detailed in the next piece). Large, persistent fiscal deficits are themselves a demand-side force pushing up inflation. Chronic government spending injects demand into the economy, structurally supporting rather than suppressing inflation.
Put these forces together – deglobalization, aging populations, the energy transition, AI's electricity demand, fiscal expansion – and they point in one direction: the forces that held inflation down for three decades (globalization, demographic dividends, cheap energy) are reversing or fading, while new structural forces pushing inflation higher are accumulating. That's why I believe the 'lowflation paradise' is likely over, and we have entered an era of a structurally higher and more volatile inflation baseline.
IV. But a Balance: Don't Forget the Strongest Deflationary Force
If I only told you about the inflationary forces, I'd be making the same mistake of 'one-way betting.' So I must give balance – there's an extremely powerful deflationary force offsetting the above: technological progress, especially AI.
The long-term nature of technological progress is deflationary – it boosts productivity, producing more with less input, thus lowering costs. And if AI truly delivers on its promise to massively boost productivity across industries, it would be an unprecedented deflationary force – potentially slashing costs in services (especially knowledge work), offsetting or even overwhelming the inflationary forces.
So, the future inflation picture is essentially a tug-of-war:
- Inflationary side: Deglobalization, aging, energy transition, AI's electricity demand (infrastructure phase), fiscal expansion.
- Deflationary side: AI-driven productivity revolution (if realized), the deflationary pressure of massive debts (debt burden suppresses demand).
The outcome of this tug-of-war is not settled – that's why I repeatedly caution against predicting the exact path of inflation. An interesting tension: AI is inflationary in its early stage (building data centers, consuming power) and potentially deflationary in its mature stage (boosting economy-wide productivity). Its net effect depends on the relative strength and timing of these phases – and no one can know that precisely.
V. How to Position: Recognize the 'Higher Floor, Higher Volatility' Regime
So, faced with this unresolved tug-of-war, what to do? Return to the discipline of the overarching framework – don't predict the exact path, just position the nature of the regime.
My positioning: We have likely left the 'low and stable' inflation era and entered an inflation regime of a 'higher baseline and higher volatility.' Note: This position does not require me to predict 'whether inflation will be 3% or 5% next year' (that's unpredictable). It only requires recognizing a shift in nature – inflation is no longer a background variable that can be ignored, always docile. It has reappeared as a major character that must be taken seriously and will repeatedly disturb markets.
This positioning offers clear guidance for decision-making:
- Stop assuming inflation will automatically return to 2% and stay there – that's a 'transitory'-style error of applying old-era experience to a new era.
- Prepare for a 'higher, more volatile inflation baseline' in your allocation: Favor companies with pricing power (those that can pass on cost increases), allocate a place to real assets and inflation-resistant assets (remember the gold piece, and the overheating quadrant's preference for real assets), and be wary of long-duration assets whose 'buy at any price' assumption is most vulnerable to inflation.
- But don't swing to the other extreme either: Don't bet on runaway inflation just because you believe in 'structural higher inflation' – the deflationary force of technological progress is real and powerful. Hold the 'baseline shift' position, but remain humble about the path.
This echoes the twin lessons of This Time Is Different: neither use 'this time is different' to deny genuine structural change (the lowflation paradise may indeed be ending), nor use it to assert that inflation will spiral out of control forever (that's also an over-extrapolation). The truth is often in the middle: a new normal that is higher and bumpier than the past, but not out of control.
VI. In Closing
Inflation is the macro variable most worth rethinking in this era.
The century-level misjudgment of 'transitory' tore open a possibility we'd rather not face – the three-decade lowflation paradise may not have been the norm, but a special period of history created by the convergence of globalization, demographic dividends, and cheap energy – and it may be ending. As these deflationary forces reverse one by one, and as new structural forces like deglobalization, aging, the energy transition, and AI electricity demand accumulate, the inflation baseline may be systematically lifted.
But this is not a 'inflation will spiral out of control' doomsday prophecy. Because there's also AI – a powerful, latent deflationary force – pushing back against it. The future of inflation is a tug-of-war without a decided outcome. So, I don't predict the path; I only position the nature – we have likely entered a new regime of 'higher and more volatile inflation,’ and the old playbook of 'inflation can be ignored' has expired.
If I had to leave one thought:
Stop treating inflation as a forever docile background. Interpret the end of the cheap era output by globalization as a structural shift in the inflation baseline – prepare for a new normal that is 'higher and bumpier,' but don't swing to the extreme of 'inflation will spiral out of control.' Baseline shift, path unknown – that is the reality of inflation in this era.
Next, we dissect the variable that is becoming a protagonist in this inflation story – fiscal policy. When government debt and deficits grow large enough to dominate the macro environment, we enter a new world called 'fiscal dominance.'
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Risk Disclaimer: This article is a macro-framework study and does not constitute any investment advice. Markets are risky; invest with caution.
专注投资分析、市场洞察与资产配置。不追短期波动,只理解真正驱动长期回报的东西。
