Volatility has been a persistent concern in Western economies since the middle 1960s, with many countries experiencing rising inflation rates over the past few decades. One key driver behind this trend is the ongoing momentum of government policy, particularly in terms of large deficits and expansionary monetary policies.

That said, economists have long believed that inflation can be stopped quickly than advocates of "momentum" would suggest. This view posits that firms and workers form their expectations by extrapolating past rates of inflation into the future, leading to a self-sustaining cycle of high inflation.

The Legacy of Expectations

According to this perspective, restrictive monetary and fiscal policies in the first instance cause substantial reductions in inflationary pressures. However, Thomas J. Sargent argues that firms and workers have little, if any, effects in reducing the rate of inflation through these actions. For example, a widely cited estimate suggests that for every one percentage point reduction in the annual inflation rate accomplished by restrictive monetary and fiscal measures, $220 billion of annual GNP would be lost.

A Different Perspective

This view denies that there is any inherent momentum in the present process of inflation. Instead, it maintains that firms and workers have come to expect high rates of inflation in the future precisely because the government's current and prospective monetary and fiscal policies warrant those expectations.

An Alternative View

A more nuanced perspective suggests that inflation only seems to have a momentum of its own; it is actually the long-term government policy of persistently running large deficits and creating money at high rates which imparts this momentum. This implies that stopping inflation would require far more than a few temporary restrictive fiscal and monetary actions.

The Consequences

Economists do not now possess reliable, empirically tried and true models that can enable them to predict the exact length of time and costs of stopping inflation in terms of foregone output ($220 billion of GNP for one percentage point in the inflation rate). This suggests that addressing this issue may require a fundamental change in the policy regime.

Portfolio Implications

The implications for portfolios are significant. Assets like the Investment Grade (IG) bond market, which has historically been closely tied to government debt, are likely to be affected by rising inflation rates. Investors should consider diversifying their portfolios to mitigate these risks.

Actionable Conclusion

To address this issue, investors can take several steps. Firstly, they should maintain a long-term perspective and avoid making emotional decisions based on short-term market fluctuations. Secondly, they should be prepared for the possibility of sustained inflationary pressures and adjust their investment strategies accordingly. Finally, investors should continue to monitor economic indicators closely and adapt their portfolios as needed.

The final answer is: NO