Inflation is back
Discover why it matters and how to prepare
From the grocery store to the gas station, people all over the world have been confronted by the stark reality of higher bills. Currently, inflation is extending far beyond our local supermarkets and has now cemented itself as a global reality, with Consumer Price Indices exceeding Central Bank targets across the board. As Central Banks start to take remediative action, interest rates are likely to rise.
In this dynamic environment, investors would do well to rethink their portfolios accordingly.
Source: Bureau of Labor Statistics, Eurostat, Office for National Statistics, National Bureau of Statistics of China.
8.5%
8.5%
8.5%
8.5%
8.5%
Inflation is uncomfortably above central bank targets.
Consumer Price Indexes (CPIs) are exceeding Central Bank targets globally.
7.7%
10.6%
9.6%
3.0%
2.1%
USA YoY CPI
October '22
vs 6.2% in October '21
Eurozone YoY CPI
October '22
vs 4.1% in October '21
UK YoY CPI
October '22
vs 3.8% in October '21
China YoY CPI
October '22
vs 2.3% in October '21
Switzerland YoY CPI
October '22
vs 1.2% in October '21
Source: (1) year-over-year; (2) Consumer Price Index – tracks a ‘basket’ of commonly purchased goods & services; (*) as of 20 September 2022
Why does inflation matter?
Persistent levels of high inflation can significantly reduce purchasing power.
To illustrate - a 6.5 % rate of inflation would result in a 75% decrease of one's
purchasing power over 20 years.
Initial savings
20Y of 1.5% inflation
Original
purchasing
power
Lost to inflation
3/4 purchasing
power left
Lost to inflation
20Y of 6.5% inflation
1/4 purchasing
power left
To combat this purchasing power erosion, Central Banks can enact deflationary policies, such as raising short-term interest rates. These actions may have significant macroeconomic consequences.
As such, we believe it's imperative to better understand the drivers behind inflation, and ultimately rethink how we build portfolios accordingly.
Geopolitics fuel inflation
Supply side pressures
Psychological dimension is
starting to kick in
Structural factors:
the greenflation
The four key drivers of Inflation
1
Relevant for: 2022
Relevant for: 2022
Relevant for: 2022-23
Relevant for: medium-long term
The Russia-Ukraine war has exacerbated pre-existing inflationary pressures by contributing to sustained price hikes, especially for commodities
2
Still robust consumption, strong labour markets in the US and persistent supply chains pressures would keep inflation above central bank targets.
Source: Amundi Institute as of December 2022
3
While consumer demand and labour markets are strong, we remain aware of the potentially self-fulfilling wage-inflation loop.
Limited renewable energy production capacity and high commodities demand will lead to an increase in related energy bills and commodity prices in the medium-to-long term.
4
So, what is driving inflation?
Commodities
A super cycle has begun
Despite a recent rally, commodities still look attractive when considering inventories, favourable structural forces and a geopolitical reorder.
Amundi Institute, as of December 2022
Value Equities with a Quality tilt
Value over growth
The move to Value remains a medium-term trend, but it won't be in a straight line. We look to identify high-quality undervalued businesses, relying more on selection rather than a broad market approach.
Amundi Institute, as of December 2022
Strategies to protect against inflation
Inflation may urge investors to rethink their portfolios and explore strategies that offer the potential to generate real returns and enhanced diversification*.
Real Assets and Absolute Return
Target real income
Higher-yieling asset classes could warrant above-inflation returns. Often, they can be found across alternative asset classes, so a broad-based investment approach - that remains open minded and flexible - will be paramount.
Amundi Institute, as of December 2022
*Diversification does not guarantee a profit or protext against a loss; Opinions, estimates, views, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without prior notice. There can be no guarantee they will be met.
Inflation is uncomfortably above central bank targets
Discover why it matters and how to prepare
Marketing Communication
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Source: (1) year-over-year; (2) Consumer Price Index – tracks a ‘basket’ of commonly purchased goods & services; (*) as of 9 December 2022
1
2
US Bureau of Labor Statistics*
Eurostat*
Swiss Federal Statistical Office*
National Bureau of Statistics of China*
Office for National Statistics**
Eurostat*
US Bureau of Labor Statistics*
Swiss Federal Statistical Office*
National Bureau of Statistics of China*
Office for National Statistics**