Navigating Rates

Inflation cheat sheet: How to invest when inflation is high

Inflation cheat sheet: Key facts, figures and definitions


Inflation is high in much of the developed world, although there are signs headline inflationary pressures may be waning. But higher prices may stick around. Core inflation, excluding volatile food and energy prices, are likely still to peak. So, how can investors navigate inflation?

Click the icons below for quick answers to some of the most common inflation questions.

4 factors pushing headline inflation lower

4 factors keeping core inflation higher

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What’s good about inflation

Some inflation is a good thing for economies – and for equity valuations
  • A healthy economy grows at a sustainable rate, and inflation is a typical by-product of economic growth.
  • Fixed income can offer potential tools to manage changing inflation and interest rate risks.
  • A moderate amount of inflation can also be good for the stock market, largely because reasonably higher prices can lead to higher earnings for companies.
  • We found that for the S&P 500 Index, the highest equity valuations were observed for inflation rates of between 2% and 4%. But when inflation is beyond 5% or so, we tend to see lower earnings and lower levels of consumption overall.

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What’s bad about inflation

Even a small amount erodes purchasing power
  • A 3% inflation rate can reduce the value of an asset by nearly 25% in just 10 years.
  • That’s why inflation has been called a “stealth threat” to portfolios.

Effect of 3% annual inflation rate on initial EUR 100,000 hypothetical investment

Effect of 3% annual inflation rate on initial EUR 100,000 hypothetical
investment Source: Allianz Global Investors. Hypothetical example for illustrative purposes only.
  • Base effect: term sometimes used when measuring inflation. When comparing two points in time, if the inflation rate is unusually low at one end (the “base”), even a small rise can appear to be an outsized increase in the inflation rate.
  • Behind the curve: term used to describe when central banks deliberately do not raise interest rates fast enough to head off inflation.
  • Break-even inflation rate: the sum of the expected inflation rate and the inflation premium. Signifies the average inflation rate where an investor would achieve the same return from either a) receiving the fixed average inflation rate or b) receiving the actual inflation as a variable cash flow.
  • CPI (consumer price index): usually refers to headline CPI, also known as headline inflation. This is a key inflation metric for the US and UK, among other regions. Refers to the full hypothetical “basket” of goods and services vs core CPI/core inflation. Because headline inflation is volatile, it is considered not very predictive over the short term.
  • Core CPI (consumer price index), core inflation: calculated by subtracting volatile food and energy prices from headline inflation.
  • CPI-U (consumer price index for all urban consumers): measures the average change over time in the prices paid by US urban consumers for a market “basket” of consumer goods and services.
  • Deflation: when inflation falls below 0%.
  • Disinflation: when the rate of inflation falls, but doesn’t go into negative territory.
  • Expected inflation rate: represents market participants' expectation of the average yearly rate of inflation – ie, the change of the underlying price index.
  • HICP (harmonised index of consumer prices): CPI as calculated in the European Union (EU). Types of HICP include MUICP (the monetary union index of consumer prices, covering the euro area); EICP (European index of consumer prices, for the whole EU); national HICPs (for each of the EU member states); EEACIP (European Economic Area index of consumer prices): an additional HICP index for the European Economic Area (EEA) that covers the EU, Iceland and Norway.
  • Hyperinflation: a disruptively rapid rise in inflation, generally more than 50% per month.
  • Inflation expectations: the expectations of consumers and businesses on the future rate of inflation. High inflation expectations can actually push inflation up.
  • Inflation risk premium: the compensation for unexpected inflation or deflation. It is similar to an insurance premium against unexpected moves.
  • Loose/easy monetary policy: economic shorthand for how central banks expand the supply of money (via low rates, asset purchases and more) to stimulate economic growth. Also known as expansionary or accommodative monetary policy.
  • Money supply: measures an economy’s supply of cash, liquid bank accounts, long-term deposits, etc. When the money supply outpaces economic output, inflation generally follows because there is more money chasing the same amount of goods and services.
  • Nominal: before inflation is factored in (as in nominal yield, nominal growth rate, etc).
  • Output gap: the spare capacity in the economy – the difference between actual growth and potential growth. In recent years, the global economy was operating below its full potential, so the output gap increased. This is typical during economic slowdowns or recessions. Now, the output gap is shrinking.
  • PCE: the price of goods and services consumed by all households, and by nonprofits serving households. PCE has tended to be lower than CPI.
  • Quantitative tightening: monetary policies that reduce the balance sheet of a central bank. It is the opposite of quantitative easing, policies that involve central banks buying market securities to increase the money supply.
  • Real: after inflation is factored in.
  • Reflation: when deflation stops or reverses.
  • Stagflation: a period of high inflation, slow economic growth and high unemployment.
  • Wage share: the portion of economic output that gets paid to workers in the form of compensation.

1. Source: Haver Analytics and IMF staff calculations.
Note: The figures show the developments in headline and core inflation across 18 advanced economies and 17 emerging market and developing economies. Core inflation is the change in prices for goods and services, but excluding those for food and energy (or the closest available measure). For the euro zone (and other European countries for which the data are available), energy, food, alcohol, and tobacco are excluded. percentiles of inflation across economies.


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