Investing in Inflation Protection
| November 2010
MSCI Applied Research
© 2010 MSCI. All rights reserved.
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1. Investing in Inflation Protection
The Decade Ahead: Inflation or Deflation?
Both inflationary and deflationary concerns have emerged as global economies continue to
struggle with recovery. Prior to the financial crisis, asset prices had soared, energy prices most
spectacularly, causing inflation to peak in many western countries. US inflation, for instance, hit a
high of 5.5% in July 2008. The crisis propelled the shift in economic sentiment that had already
begun to deteriorate in the beginning of 2008. Inflation rates across the globe were near flat or
even negative in 2009:
0.5% (UK), and
0.4% (euro area). In the US, over the 12
months ending in September, CPI-U rose 1.14%; year-to-date, the index has risen just 0.53%.
Overall US inflation still remains well below the historical average.
Exhibit 1, for instance, shows the most recent consensus forecasts for US and euro area inflation
provided by the Philadelphia Federal Reserve Bank’s Quarterly Survey of Professional
Forecasters and the ECB Survey of Professional Forecasters. These remain well below long-run
Exhibit 1: Consensus Forecast for Headline Inflation (US: 2010 Third Quarter Release; Europe: 2010
Third Quarter Release)
2011 Q4/Q4 Average
2012 Q4/Q4 Average
Sources: Philadelphia Federal Reserve (August 13, 2010); European Central Bank (August 13, 2010)
Looking forward, there are several points of debate. On one hand, inflation concerns have arisen
based on low interest rates, the implementation of Quantitative Easing, the expansion of the
monetary base, and the size of fiscal stimuli implemented in many countries.
On the other hand,
restrained economic growth, high unemployment rates, low velocity of money, and low capacity
utilization have posed major risks to the recovery that continue to fuel deflationary concerns.
These fears vary depending on the country in question. Inflation concern is stronger in countries
with fast-rising consumption, such as China, India, and Australia. They are weaker in Western
economies that have muted consumption.