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Changing inflation expectations

Is there a risk of inflation?

Changing inflation expectations

Economic events of recent years – for example, the Global Financial Crisis, European Debt Crisis and falling oil prices – have contributed to low inflation expectations. However, since the US presidential election, this has changed. Even in the face of monetary stimuli of recent years, inflation in the US as well as in the Eurozone has remained way below the respective Central Bank's target rate.

Following the Financial Crisis of 2007-2008, US inflation averaged 1.4% from October 2008 to October 2016 compared to the long-run average of 4.1% (from January 1971). But during the September 2016 meeting, Federal Open Market Committee (FOMC) members indicated that US inflation is expected to take an upward trend in the coming years. The election of Donald Trump and the expected fiscal policy changes are further shifting expectations.

So, what happens if there’s a rise in inflation?

Many investments, like nominal bonds, have structurally no protection against a sharp rise in inflation. As we point out elsewhere, Treasury Inflation-Protected Securities – or TIPS – are expected to protect investors’ portfolios against inflationary risk.

Investors should be aware that past performance is not an indicator of future results.