Allocation Views

Our Franklin Templeton Investment Solutions team continue to view inflation as being primarily a demand-driven phenomenon.

Edward D. Perks, CFA

Edward D. Perks, CFAChief Investment Officer, Franklin Templeton Investment Solutions

Gene Podkaminer, CFA

Gene Podkaminer, CFA Head of Multi-Asset Research Strategies, Franklin Templeton Investment Solutions


As we moved into a new year, the flow of economic data and central banks’ likely response to it suggest that investors have no shortage of challenges to face. Indeed, when we sat down to consider the outlook for 2022 and review how our conviction levels were shifting, we anticipated that this was a time when a nimble approach could be especially appropriate.

The ongoing threat posed by the Omicron variant of COVID-19 further complicates the picture. Although a seemingly milder form of the disease, which may help move us toward the end of the pandemic phase if it increases the level of natural and vaccine-induced immunity, it will still likely act as a drag on confidence and activity in the near term. Equally, if governments respond to the resurgent pandemic with tighter restrictions, it could easily delay the normalization of supply chains and inflation, which remains elevated. For global society, this may feel increasingly like walking a tightrope!

Inflation expectations remain a concern

Inflation developments remain a dominant concern for us, for the market more broadly and notably for the US Federal Reserve (Fed). The current pace of inflation is showing tentative signs of approaching a peak. Certain measures of prices, for example in US purchasing managers’ indexes, have eased back a little. Similarly, the costs of shipping goods across the Pacific and globally have come off peaks seen late last year (see Exhibit 1). However, the ongoing impact of the Omicron variant, especially in economies that continue to adopt a zero-tolerance approach to containing the virus’s spread, such as China, may delay the peaking of supply-chain worries. It may also slow the normalization that we continue to anticipate over the course of this year. Although we, like the Fed, do not anticipate the current surge in inflation to be permanent, it feels like the notion of persisting with calling it temporary was itself too much of a highwire act to be worth the risk.

THE COST OF SHIPPING GOODS MAY HAVE PEAKEDExhibit 1: Global freight indexes, As of December 31, 2021

Sources: Harper Petersen & Co., Bloomberg, Macrobond. Important data provider notices and terms available at

As a result, we have reviewed our key inflation theme this month. We continue to view inflation as being primarily a demand-driven phenomenon. Hence it is likely to moderate of its own accord as growth decelerates toward a more trend-like pace later in 2022, but the risks of this feeling more permanent are mounting.


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