Just a year ago, inflation appeared high but under control. Published annual consumer price rises stood at 2% in the eurozone and 5% in the US, which was above average. The US Federal Reserve dismissed concerns, saying price rises reflected “transitory factors.”
What has happened since has surprised all the main advanced economy central banks. The latest published inflation rates stand at 8.6% in the US, 8.1% in the eurozone and 9.1% in the UK.
How could this happen? What are the consequences? Which investment strategies make sense, now that inflation is back ? Find the answers to these questions in our infographic.
Inflation is the enemy of bond investors because over time inflation erodes the purchasing power of a bond’s fixed coupon.
As we have seen this year, inflation can also pose challenges for equity investors, especially in the short term. In the short run, rising input costs can erode corporate profit margins. Stocks, though, have historically been a solid long-term hedge against moderate levels of inflation.
Periods of very high inflation can upset equities – most stocks performed poorly during the two double-digit spikes in inflation during the 1970s.
Inflation can also impact equity performance indirectly. Since the start of 2022, rising interest rates to counteract inflation have triggered a fall in of asset valuations, as the net present value of a stock’s future cash flows are discounted using a higher interest rate.
In this infographic, we first give our analysis of the inflation revival and the likely consequences. We then review investment ideas that we think make sense for investors seeking to protect portfolios from inflation.
To discuss further, please contact your dedicated BNP Paribas Asset Management client relationship manager.
Disclaimer
