Inflation was the big surprise in 2021. At the beginning of the year, the average US inflation forecast by economists for the end of 2021 was around 2%, while the latest reading in December came in at 7.0% YoY, the highest level since 1982.

Psychological forces could have played a major role in underestimating inflation. Today, few people have memories of the ‘70s great inflation period (less than 25% of the US population is aged 55 years and above). This may explain why the recollection of the past decade of secular stagnation could have led people to believe that the inflation pick-up expected in the post-Covid reopening phase of the economy was going to be short-lived, while it was not.

Indeed, this psychological dimension is a major driver of inflation expectations, but monetary forces also play a key role. On this front, the traditional relationship between money creation and inflation appears to have been dormant over the past decade, further complicating the forecasting of inflation dynamics. Yet, assessing the future direction of inflation, inflation expectations and monetary policy is now the most important task for investors. These will drive not only short-term opportunities, but may also signal a change of economic and financial regime, which will have profound implications on strategic asset allocation.