White Papers

Forecasting Inflation

14/01/2013

Simon Stevenson

Simon Stevenson

Head of Strategy, Multi-Asset

One topic that has become the subject of a great deal of debate has been the inflation outlook. Two diametrical views compete for dominance. One view is that the unprecedented level of central bank stimulus will see inflation accelerate aggressively. The other view is that the large output gaps suffered by many economies will see deflationary forces take control. So far, neither has been right, with inflation being well behaved both here and abroad.

This paper explores the topic in detail and discusses the factors that will drive inflation over the medium to long-term. This is important for not only deciding the proportion of inflation hedges required to successfully manage a diversified portfolio but is also very important in other areas of portfolio construction. There is a strong relationship between PE ratios and inflation, and also between equity/bond correlations and inflation. Both are important factors to consider when constructing diversified portfolios.

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