Viewpoints

Inflation Awakening

The road ahead could look very different for inflation, and investors may want to consider whether they are prepared.

Is inflation coming out of hibernation? A significant breakout of higher inflation is not our base case inflation outlook over the secular (three-to five-year) horizon. However, as labor markets tighten and the global economy feels the ripple effects of growing populism across much of the developed world, higher inflation certainly looks like a bigger risk than it has been over the past decade.

The idea behind the potential rude awakenings highlighted in our latest Secular Outlook is that investors could be misled by their rearview mirrors – and inflation is one of the macro factors that could look substantially different on the road ahead. For the past 10 years, large output gaps in every part of the world ensured an ample supply of labor. This logically translated into lackluster wage growth and limited price pressures.

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Past performance is not a guarantee or a reliable indicator of future results.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

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The Consumer Price Index (CPI) is an unmanaged index representing the rate of inflation of the U.S. consumer prices as determined by the U.S. Department of Labor Statistics. There can be no guarantee that the CPI or other indexes will reflect the exact level of inflation at any given time. The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index.

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