Hood: “How should investors should think about inflation in a world of sluggish growth and easy monetary policy? The so-called “Great Moderation” in economic performance in the years leading up to the 2008-2009 recession featured broadly stable inflation at satisfactory levels in the U.S. and other developed countries. Somewhat surprisingly, inflation has remained steady in the aftermath of the crisis, as deflation failed to take hold (except, of course, in Japan) despite low levels of economic activity and high unemployment rates.
Although central banks’ easy monetary policies have prompted concern about the possibility of a new acceleration in inflation, that risk looks remote due, in part, to well-anchored inflation expectations. However, two risks—some type of shock or monetary policy mistake—could potentially spur significant and sustained increases in inflation.
Experience suggests that a group of indicators, such as those identified above, should signal any developing inflation problem, and investors can monitor this information for early warning signs. As a group, this panel of indicators—ranging from surveys that track inflation expectations and labor market dynamics, to indexes that track and capture global trends in available resources—is flashing green, suggesting there is little cause for concern.”
Dessner: “I agree, Michael. In a world of low yields and slow growth, inflation fears appear to have eased and again, that doesn’t mean the need for managing inflation risk has passed. Regardless of one’s view on where inflation is heading, we believe that in addition to warning signs, there are frameworks to address inflation risk in portfolios and the best ones incorporate it as an ever-present risk.”
Hood: “At J.P. Morgan, we also contemplate the investment implications of inflation concerns, focusing on asset classes and ideas that may provide protection against not only the steady erosion of real value by ongoing inflation but also against inflation surprises.”
Dessner: “It's true. Individual assets behave differently depending on the inflationary environment and, as a result, offer investors varying degrees of protection. It is also important to contemplate inflation risks in the context of the broader business cycle as the state of the economy can often be a key driver in the discussion around inflation risk.
The right diversified mix of assets is vital and can help deliver a premium over inflation with greater consistency than a more narrow and concentrated approach. Inflation can affect investors and portfolios in many ways.”
Hood: “Overall, investors cannot afford to lose sight of the topic entirely. Central banks have made policy mistakes in the past and could do so again. Through this theme we hope to bring forth new ideas around inflation prediction, protection and potential investments.”