Erste Asset Management

Are we heading for inflation?

Are we heading for inflation?
Are we heading for inflation?
(c) iStock Photo
Share post:

[post_poll id=”1988″]

The rate of inflation has been quite substantial most recently, in comparison with the recent past and surprisingly so for many market participants. The harmonised consumer price index for the Eurozone was 2% higher on a year-on-year basis in February, which was also the highest value since 2013.


The rate of inflation in the Eurozone has increased significantly in the past months

Sources: Erste Asset Management; Eurostat, data as of 31 March 2017

Experts caught off guard

Indicators such as the Citi Inflation Surprise indices measure “objectively”, whether analysts correctly estimate inflation. On the basis of these indicators it would seem that the inflation figures and the relevant drivers have been underestimated in the past months on a global scale, in particular in the Eurozone. Here, the analysts have traditionally had a hard time with their estimates. However, inflation had never been underestimated by such a significant degree since the introduction of the euro in 1999.

Due to the unorthodox monetary measures since 2008, the question of whether this is the beginning of the Great Inflation is a legitimate one. And if it is not the “Great” one, then perhaps a smaller one?

Sources: Erste Asset Management; Citi, Bloomberg, data as of 31 March 2017

Inflation rate vs. core inflation rate

The upsurge in prices in the past month has been driven by a drastic increase in energy and food prices. Together, they account for almost 30% of the basket of goods used for the calculation of inflation. For one thing, these two components are almost impossible to steer by the central bank, and they are also significantly more volatile than the other components. Therefore, the central bank mostly uses the so-called core rate if inflation, which is based on a basket of goods that does not contain energy or food (prices). This core inflation rate has been below 1% in the Eurozone for numerous years without indicating any signs of an upward trend recently either. This suggests that the rise in inflation is not due to the economic environment, but to the increased oil and food prices. Once these prices stop rising or even fall, lower rates of inflation can be expected to follow suit. In fact, the inflation rate in March had dropped to 1.5% p.a. and thus fell substantially short of the reference value of February.

“Home-made” inflation pressure in the USA?

In the United States, inflation has also risen on the back of increasing energy prices recently. Given the different scenario in the USA, the question of “home-made” inflation is justified. The US economy is expected to reach full employment in 2017. This could result in a higher increase in wages and prices in the medium term, in other words, in a broadly based, sustainable increase in inflation. The stats already indicate higher average wage increases than a few years ago. However, at 2.2% they are still moderate.

Quelle: Bureau of Labor Statistics, CPI Detailed report, Data for February 2017

How does Erste Asset Management rate the risk of inflation?

  • In the short run, we do not see any risk of inflation, neither in the Eurozone nor in the USA
  • The market does not expect any significant rise in inflation either: the inflation expectations priced into 10Y inflation-protected government bonds were at 1.14% for Germany and at 1.84% for the USA on 21 April 2017 – i.e. very low in comparison with historical figures.
  • Due to higher oil prices and higher growth expectations in the second half of 2016, a short-term rise in inflation expectation was noticeable. However, these effects will shortly be coming to an end.
  • Globally speaking, we do not expect to see any significant rise in inflation rates either due to the current economic scenario. While many economies such as Germany and the USA are operating above capacity, there are still a lot of countries such as Italy or Spain where this is not the case. This should be enough to ward off (the fear of) global inflation for a while.

[post_poll id=”1988″]


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to § 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the web site within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the web site A summary of investor rights is available in German and English on the website as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to § 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

Leave a comment Required fields are marked with *

Your email address will not be published. Required fields are marked *