Click the icons below for quick answers to some of the most common inflation questions.
Inflation forecasts have risen in much of the developed world1
Consensus CPI forecasts
3 factors pushing inflation up over the short term
4 factors pushing inflation up over the long term
What’s good
about inflation
Some inflation is a good thing for economies – and for equity valuations
- A healthy economy grows at a sustainable rate, and inflation is a typical by-product of economic growth.
- A moderate amount can also be good for the stockmarket, largely because reasonably higher prices can lead to higher earnings for companies.
- We found that for the S&P 500 Index, the highest equity valuations were observed for inflation rates of between 2% and 4 %. But when inflation is beyond 5% or so, we tend to see lower earnings and lower levels of consumption overall.
- However, these high valuations (and higher inflation) have followed years of very “loose” monetary policy from central banks. Central banks are now determined to take action against inflation, which may put pressure on valuations as well.
What’s bad
about inflation
Even a small amount erodes purchasing power
- A 3% inflation rate can reduce the value of an asset by nearly 25% in just 10 years.
- That’s why inflation has been called a “stealth threat” to portfolios.
Effect of 3% annual inflation rate on initial EUR 100,000 hypothetical investment
Source: Allianz Global Investors. Hypothetical example for illustrative purposes only.
Consider inflation-hedging assets
- Inflation-linked bonds – such as Treasury inflation-protected securities in the US and gilts in the UK – directly benefit from rising inflation expectations, since they are designed to help protect investors from inflation.
- An active fixed-income investor can seek returns regardless of the inflation environment – which is critical given the uncertain inflation outlook.
- Equities have historically provided good returns when inflation is moderate – in part because reasonably higher prices can lead to higher earnings
for companies, and investors tend to pay more for earnings growth. - During periods of higher inflation, commodities and gold have historically done very well.
- Institutional investors may want to consider private-market assets to hedge against – or even benefit from – a sustained return to inflation.
- Base effect: term sometimes used when measuring inflation. When comparing two points in time, if the inflation rate is unusually low at one end (the “base”), even a small rise can appear to be an outsized increase in the inflation rate.
- Behind the curve: term used to describe when central banks deliberately do not raise interest rates fast enough to head off inflation.
- Break-even inflation rate: the sum of the expected inflation rate and the inflation premium. Signifies the average inflation rate where an investor would achieve the same return from either a) receiving the fixed average inflation rate or b) receiving the actual inflation as a variable cash flow.
- CPI (consumer price index): usually refers to headline CPI, also known as headline inflation. This is a key inflation metric for the US and UK, among other regions. Refers to the full hypothetical “basket” of goods and services vs core CPI/core inflation. Because headline inflation is volatile, it is considered not very predictive over the short term.
- Core CPI (consumer price index), core inflation: calculated by subtracting volatile food and energy prices from headline inflation.
- CPI-U (consumer price index for all urban consumers): measures the average change over time in the prices paid by US urban consumers for a market “basket” of consumer goods and services.
- Deflation: when inflation falls below 0%.
- Disinflation: when the rate of inflation falls, but doesn’t go into negative territory.
- Expected inflation rate: represents market participants' expectation of the average yearly rate of inflation – ie, the change of the underlying price index.
- HICP (harmonised index of consumer prices): CPI as calculated in the European Union (EU). Types of HICP include MUICP (the monetary union index of consumer prices, covering the euro area); EICP (European index of consumer prices, for the whole EU); national HICPs (for each of the EU member states); EEACIP (European Economic Area index of consumer prices): an additional HICP index for the European Economic Area (EEA) that covers the EU, Iceland and Norway.
- Hyperinflation: a disruptively rapid rise in inflation, generally more than 50% per month.
- Inflation expectations: the expectations of consumers and businesses on the future rate of inflation. High inflation expectations can actually push inflation up.
- Inflation risk premium: the compensation for unexpected inflation or deflation. It is similar to an insurance premium against unexpected moves.
- Loose/easy monetary policy: economic shorthand for how central banks expand the supply of money (via low rates, asset purchases and more) to stimulate economic growth. Also known as expansionary or accommodative monetary policy.
- Money supply: measures an economy’s supply of cash, liquid bank accounts, long-term deposits, etc. When the money supply outpaces economic output, inflation generally follows because there is more money chasing the same amount of goods and services.
- Nominal: before inflation is factored in (as in nominal yield, nominal growth rate, etc).
- Output gap: the spare capacity in the economy – the difference between actual growth and potential growth. In recent years, the global economy was operating below its full potential, so the output gap increased. This is typical during economic slowdowns or recessions. Now, the output gap is shrinking.
- PCE: the price of goods and services consumed by all households, and by nonprofits serving households. PCE has tended to be lower than CPI.
- Real: after inflation is factored in.
- Reflation: when deflation stops or reverses.
- Stagflation: a period of high inflation, slow economic growth and high unemployment.
- Wage share: the portion of economic output that gets paid to workers in the form of compensation.
- West Texas Intermediate crude oil (WTI): one of the standard ways to track oil prices.
1. Source: Bloomberg and Consensus Economics. Data as at 20 June 2022. Consensus data reflect estimates for average inflation in a full calendar year. They are not directly comparable to current inflation readings.
2. Source: Bureau of Labor Statistics. Data as at 13 July 2022. Current inflation figures reflect year-on-year rates for the latest (single) month.
3. Source: Marketwatch as at June 2022; Macrotrends as at June 2022.
2271129
-
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of this document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).