Mercer thinks lack of inflation experience will increase pressure on investment firms

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Since the financial crisis more than a decade ago, wider adoption of technology and an aging population have slowed wage growth, helping to keep inflation low.

Today, central banks are dealing with a sudden spike in consumer prices.

“Inflation strikes at the individual level. Individuals, businesses, cities, countries experience it in different ways,” Mr Nuzum said in an interview during his first trip to Australia since the pandemic began.

Inflation experience required

The sudden onset of rising consumer prices prompted major institutional investors as well as Mercer itself to seek in-house personnel experienced in times of inflation.

“Apart from Brazil and a few other countries, no one has faced inflation in their careers,” he said. “You have to go back to the people who were working in the 1980s.”

The big concern going forward was how central banks would react and whether their efforts, particularly those of the Fed, were too late given soaring consumer prices and tight labor markets.

“If the market thinks the policy response is too big or too late, you can get a market correction,” he said. “It’s very difficult to get it right, even if you take away the uncertainty caused by the virus.”

In the United States, consumer prices are rising faster than at any time in the past four decades, prompting the Fed to signal impending interest rate hikes that are expected to begin next month.

A pandemic rise for the world’s largest economy would mirror rate hikes in developed economies including the UK, New Zealand, South Korea and Norway, while bond market prices indicate the Australia will follow later this year.

Expected turnover

According to Nuzum, the focus on staff with experience in inflationary environments has increased the pressure on companies in the investment landscape to improve retention in a period of high turnover.

“There’s a talent war going on now, and it’s going to get worse,” he said. “A certain level of turnover is healthy, but I think we’re going to massively exceed it. For the white-collar world, it hasn’t hit yet, but it will.

A trend would be unaffected by inflation, according to Mr. Nuzum.

The rush to private markets, which has seen large investors, including super funds, increase their allocations to private equity, venture capital and private credit, would continue, in part because of lower expected returns for the actions.

“There is strong demand for private equity globally and in Australia,” Mr Nuzum said.

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