Inflation is permanent and will weigh on stock-market returns for years, says the head of world’s largest wealth fund

• Inflation is permanent and will depress stock-market returns for years, the head of world’s largest wealth fund has said.
• The chief of Norway’s $1.3 trillion oil fund told the FT that inflation is rising in more and more places.
• Nicolai Tangen said stock and bond investors could be set for a long period of low returns.

High inflation is “permanent” and will weigh on returns in stock and bond markets for years to come, the head of the world’s largest sovereign wealth fund has warned.

Nicolai Tangen, chief executive of Norway’s $1.3 trillion fund, said he thinks inflation is rising “across the board, in more and more places,” speaking in an interview with the Financial Times published Sunday.

“You saw Ikea increasing prices by 9 per cent, you have seen food prices going up, continued very high freight rates, trucking rates, metals, commodities, energy, gas,” he said. ”We’re seeing signs on wages as well.”

Norway’s fund is a huge player in financial markets, holding the equivalent of 1.4% of all of the world’s listed companies. It’s active in 73 countries, and it invests in stocks, bonds, real estate and renewable energy infrastructure.

Tangen said he is “the team leader for team permanent” – those who believe strong price rises are here to stay, as opposed to those who believe the surge in inflation is transient.

“How will it pan out? It hits bonds and shares at the same time … for the next few years, it will hit both,” he told the FT.

Stock and bond prices have dropped sharply in 2022 so far as investors fret about Federal Reserve monetary policy, red-hot inflation, and economic growth.

The benchmark S&P 500 stock index is down 7% for the year, with tech companies the biggest fallers. The yield on the key 10-year US Treasury note, which moves inversely to the price, has risen from around 1.63% at the start of the year to 1.784% Monday.

US consumer price index inflation came in at a 39-year high of 7% year-on-year in December. Markets now expect the Fed to hike interest rates five times in 2022 as it tries to get prices under control.

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“With extremely low interest rates and a very high stock market, and with increasing — and in some places, accelerating — inflation, we could see a long period of time with low returns,” Tangen told the FT.

However, many investors believe central banks will succeed in getting inflation under control, although some worry that they may have to induce recessions.

The Bank of England is widely expected to hike interest rates for the second meeting in a row on Thursday, as it grapples with strong price rises.

A closely watched US inflation expectations gauge, the 10-year breakeven rate, stood at 2.44% Friday. That suggests markets think inflation will average 2.44% over the coming decade, well below December’s 7% rate but above the Fed’s 2% target.