Inflation describes a sustained increase in prices over time. Inflation makes a dollar/euro/currency worth less in the future compared to today. So when inflation persists, more currency is needed to buy the same amount of goods or services as before. Economists often track inflation using a metric known as the Consumer Price Index (CPI), which tracks the prices of a generic ‘basket’ of commonly consumed goods and services.
What is inflation?
Rising inflation is now a global phenomenon. The year over year (YoY) inflation rate in the US was 8.5% in March 2022 versus 2.6% in March 2021. Inflation in the Eurozone was 5.9% in February 2022 YoY, compared to 0.9% a year earlier. The UK saw prices rise 6.2% YoY in Feb 2022 (vs 0.4% in 2021). In Switzerland (1.9% YoY Feb/’22 vs -0.4% in Feb/’21) and in China (1.5% YoY Mar/’22 vs 0.4% Mar/’21, the YoY inflation rate was below 2%, but rising significantly compared to previous years.
Is inflation rising globally?
Source: US, Bureau of Labor Statistics, as of April 2022, EU, Eurostat, as of April 2022, UK, Office for National Statistics, as of April 2022, Switzerland, Eurostat, as of April 2022, China, National Bureau of Statistics of China, as of April 2022
The world is experiencing multiple shocks at once, as an already disrupted supply chain post-covid faces increased commodity prices. Four drivers are pushing up inflation at the moment:
For more information on the inflationary drivers, view our Inflation guide.
What is driving inflation?
We anticipate inflation to remain higher than has been the norm over the past two decades, due to several inflationary trends in the short-medium term. However, it is still uncertain how unpredictable deflationary forces like technological advancements and an ageing population will interact with inflationary pressures.
Is inflation temporary?
On average, inflation means the everyday cost of living will increase. However, on an individual level, the effects of inflation are strongly dependent on spending patterns. In a strong labour market, employees might be able to balance part of the effects of inflation with increased wages and maintain their purchasing power. When it comes to savings, inflation erodes the long-term purchasing power over time and calls us to pay attention to real returns.
What is the impact of inflation on our day-to-day lives?
Real returns are returns adjusted for inflation. For example, if a portfolio generates an 8% return and inflation is 1%, the real return is 7%. If inflation is high at 10%, the same 8% return would result in a negative 2% real return, reflecting a loss in purchasing power. Real returns offer a better perspective of your long-term purchasing power during times of higher inflation.
What are real returns?
Inflation makes a dollar worth less in the future than today. As inflation rises, investors demand higher returns to compensate. Central banks aim to maintain an acceptable inflation rate, and take action by adjusting short-term interest rates to stay within an acceptable range of this target. The Federal Reserve, for example, often raises a short-term interest rate known as the "federal funds rate" when faced by high levels of inflation. Raising these interest rates can have a negative impact on investments where most of the value lies in (long-term) future expectations or in cases where the investment instrument rate is fixed (e.g. a fixed-rate bond). Assets which are inherently linked to inflation like commodities or real assets can become more valuable as inflation rises, offering better real return potential.
What is the impact of inflation on my portfolio?
Inflation is not a new phenomenon, even if it was not a key factor on investors' minds over the last decade. At Amundi, we believe that you can protect your portfolio from inflation by using our strategies, based on decades of experience investing in various macroeconomic climates. If you want to find out more, have a look at our Inflation guide below showing our best ideas for real returns based on our expertise.
How can I prepare my portfolio for inflation?
1. Resurging consumer demand
2. Rising geopolitical tensions and supply chain bottlenecks
3. Psychological dimension
4. Structural factors, such as the greenification of the economy.
Source: ECB, 2022, What is inflation?, U.S. Bureau of Labor Statistics, 2022, Consumer Price Index
Source: Amundi Institute, as of April 2022, Inflation is starting to burn.
Source: Amundi Research, as of January 2022, Resilient multi-asset portfolios in an Inflationary regime, Investment insights blue paper.
Source: IMF, as of March 2022, Tight Jobs Market Is a Boon for Workers But Could Add To Inflation Risks, IMF Blog
Source: Federal Reserve, 2020, How does the Federal Reserve affect inflation and employment? , Amundi Institute, as of April 2022, Inflation is starting to burn.
Source: Amundi Institute, as of April 2022, Inflation is starting to burn.