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, if the prices are decreasing then inflation is falling.
We offer investors a wide range of inflation solutions across markets, duration and inflation exposure which could help to manage each investor’s challenges.
Read our experts views and analysis on the impact of inflation and what this could mean for investors’ portfolios.
What are the main contributors to inflation?
· Money supply: This is stock of currency and other liquid instruments available in a countries 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 inflation1.
What is AXA Investment Managers approach to inflation?
AXA Investment Managers was one of the first European asset managers to offer a dedicated inflation-linked bond fund in 1983. Since then, we have built up over 302 years’ experience as a firm managing inflation-linked assets for a diverse client base around the world, including supranationals, central banks, pension funds, and insurance companies, among others.
· Experienced teams: At AXA Investment Managers we have a highly experience team dedicated to inflation-linked funds.
· A diversified offering of solutions: Our range of strategies include single market, global and customised inflation-linked bond strategies which provide the desired exposure to real yields, breakeven and realised inflation.
· Access to market insight and liquidity: Our significant size – over €14bn in inflation-linked assets under management globally3 - provides us with access to liquidity, along with excellent market insights.
Main risks associated with the asset class
Interest rate risk
Derivative and leverage risk
 Source: AXA IM. For illustrative purposes only.
 Source: AXA IM as at 31/03/2020. Information about the staff team at AXA Investment Managers (AXA IM) is only informative.
 Source: AXA IM as at 31/03/2020 including all inflation-linked assets within our Fixed Income platform.
Tapering isn’t lift-off
As the global economic recovery widens, attention is clearly turning to when and how central banks will begin to reduce the bond-buying programmes introduced to bolster economies at the height of the ...
Inflation: Transitory for longer
Increasing consumer demand, raw material shortages and prolonged supply chain disruptions have conspired to ensure inflation remains abnormally elevated, but we still believe this backdrop will ultim ...
EM titans: How China and India are driving growth for fixed income investors
Changes in domestic consumption patterns in emerging markets and the rise of the middle class are likely to see a huge shift in economic power away from advanced economies - and Asia is expected to b ...