Preparing for inflation
Is your portfolio ready for the challenges of inflation?
Preparing for inflation challenges
Inflation is the measure of how the general level of prices rise over time and how, as a result, the purchasing power of money falls over the same period.
Inflation has an important impact on investments as it erodes the real value of assets over time. Even low levels of inflation may diminish performance through what we call the ‘snowball effect’ or the compounding of inflation over the long term.
Impact of inflation over time
This chart shows the impact that 1%, 2.5% and 5% inflation can have on investments over 30 years
Source: AXA Investment Managers. For illustrative purposes only.
How is inflation measured?
Inflation is estimated using price indices, this is based on baskets of goods and services – such a bread, milk, clothing etc. – which evolve over time as products on the market and consumers’ interests change. These baskets vary depending on the market:
CPI (Consumer Price Index)
HICP (Harmonised Index of Consumer Prices)
RPI (Retail Price Index)
The price of goods within the basket are measured monthly and any change in price across the basket will provide an indication of inflation levels. If the average price across the basket is increasing, this means inflation is rising. Conversely, if the prices are decreasing, then inflation is falling.
What are the main contributors to inflation?
Money supply: This is stock of currency and other liquid instruments available in a country’s economy at any one time. If the growth of money supply increases faster than the level of productivity in the economy, price increases are likely as there is more money pursuing the same amount of goods and services.
Cost-push inflation: If there is an increase in the costs for companies, such as raw materials, the companies will pass this on to consumers through the sale prices.
Demand-pull inflation: This occurs when the economy is growing too fast and demand strongly outweighs supply, pushing prices higher.
Inflation expectations: Inflation tends to be self-serving. When discussing inflation targeting policies, the message from Central Banks is that “future inflation will be as important as past inflation”. However, current measures may jeopardise credibility.
Currency war: Currency depreciation makes import prices more expensive, leading to an increase in inflation.
AXA IM's inflation solutions
We offer investors a wide range of inflation solutions across markets, duration and inflation exposure which could help to manage each investor’s challenges.
Inflation-linked bond funds: Inflation-linked bonds may be a way to manage the risk of higher inflation, but other asset classes can also help investors prepare their portfolio for changes in inflation as they tend to benefit from an inflationary environment.
Our inflation strategies focus on investing in inflation-linked bonds and nominal bonds issued by the same issuers, as part of breakeven trades.
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Main risks associated with Inflation solutions
Interest rate risk
Derivative and leverage risk