IN the first quarter of this year, there was turmoil in the financial markets due to concerns about rising inflation, but the discussion focused on demand-side inflation. My assessment of the primary reason for the immediate rise in inflation is that it is due to a lack of supply and, thus, not an inflation driven by demand due to overheated economies. There is a difference between the two forms of inflation and, unfortunately, supply-side inflation is not the best news for the financial markets and investors.

The price of a barrel of oil has now reached a level that has led governments in several countries to assess that the price has become too high and that is even before the heating season has really begun in the northern hemisphere. It is worth noting that several countries, led by the United States, opened-up some of the national oil reserves this week, which is a real intervention in the oil market.

Of course, the oil price represents only part of the whole inflation trend, but it still has a global significance, especially when gas prices also follow the upward trend. The risk picture also means that there is no easy solution to the supply situation.

I have long seen the labor market, especially the service sector in Europe and the United States, as a source of long-term wage inflation. Now, more data about the labor market is starting to become available after the economies in Europe and the United States have reopened. In the United States, the labor force participation rate is 1.7 percentage points lower than before the Covid-19 crisis. This corresponds to approximately 4 million people that are currently missing in the US labor market. The same picture applies in the United Kingdom and in Germany, the service sector is also markedly short of labor. Globally, there is no shortage of labor, but significantly stricter immigration rules mean that employers in several countries cannot access the available labor force in other countries.

Moreover, the Covid-19 crisis is atypical, in the sense that many households in the United States and Europe have almost emerged economically strengthened from the Covid-19 crisis. This is because house prices have continued to skyrocket in most countries and the same has been the case for the stock markets. Thus, a larger number of people from the labor market have been able to retire earlier than expected.

I am concluding that this change is significantly more structural and long-lasting than first assumed, perhaps reaching as far as into 2023 before the labor market in a number of Western countries has found its balance again.

I have belonged to the majority in the financial markets who argue that the largest share of the rise in inflation will be temporary. The higher inflation is due to the fact that the entire world economy must restart after the Covid-19 crisis, creating bottlenecks in transportation and production. That argument can also be found at the US Federal Reserve Bank which, however, plans to raise interest rates in response to the economy coming back on track.

The very extreme attitude is found at the European Central Bank (ECB), which stubbornly maintains the negative interest rate. Precisely with the argument that higher inflation is temporary and the problem normally solves itself because prices find a new level, therefore, the increasing inflation fades out and after 12 months, inflation has calmed down again. The change in the assumptions that I am dealing with is that the general expectation in the financial markets is wrong — meaning, the inflation rate remains at a high level.

The temporary argument is based on the fact that oil production has not fully adapted to the rising demand associated with the reopening of economies. Some outsourcing destinations are still affected by regional shutdowns and hundreds of thousands of shipping containers are in the wrong places in the world. This is true and generates a temporary rise in inflation, but my concern is that it is no longer the whole truth.

An increasing proportion of the world's consumers and businesses want green energy and not energy produced on the basis of traditional fossil energy sources such as oil and coal. Therefore, for a number of years, there has been an underinvestment in fossil energy sources, which has already led several to warnings from experts because green energy cannot yet compensate for the lack of fossil energy sources.

As described, the labor market, especially in Europe and the United States, is moving extremely slowly and it might take a few years before there is yet again a better balance between supply and demand for labor.

If those assumptions start to take hold, then investors will be challenged concerning how to deal with inflation remaining high two years ahead, or until the end of 2023. I see that scenario as an increasing risk and I have no doubt that there will be second-round effects in Europe, where inflation creates new inflation.

This is becoming an increasing challenge for the stock market. In addition, I believe that the position of the ECB may result in an even greater distortion of the bond market and the real estate market in the Eurozone/Europe.

Peter Lundgreen is the founding chief executive officer of Lundgreen's Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.