QUESTION OF THE WEEK

Will inflation rise?

Every other week, we ask for your thoughts on a top question our portfolio managers and strategists are debating. We share the final poll results and insights.

The Federal Reserve has adopted a new policy of allowing inflation to overshoot its 2% target to make up for past misses. Other forces such as deglobalization also threaten to push inflation higher in the medium term. U.S. consumer prices have grown at an average annual pace of 1.6% since 2011, according to the core PCE (the Fed’s preferred inflation measure). The latest reading was 1.3%.

Poll results, Where do you see inflation by the end of 2022?

Source: BlackRock Investment Institute with data from SurveyMonkey poll analytics. Note: Data does not include poll results from BlackRock social media accounts. 

We asked and a 34% plurality of you answered that inflation would remain roughly the same by the end of 2022. Another 11% who took our poll see the possibility of lower inflation ahead. Overall, the voting shows most of you (54%) expect inflation to rise higher or much higher in the medium term.

A slight majority of BlackRock investors also see U.S. core PCE inflation above 2% at the end of 2022. This points to upside risks to the Federal Reserve’s inflation target even as many market participants focus on near-term disinflationary risks due to still-high unemployment.

The BlackRock Investment Institute gives three reasons why inflation is likely to top even 2.5% in its latest paper on inflation:

  1. Covid-19 is delivering a significant supply shock in a world where there is already upward pressure on production costs due to forces such as deglobalization.
  2. The Fed’s new policy framework adopting average-inflation targeting should see inflation expectations rise by about 0.75% if it is seen as credible.
  3. The blurring of fiscal and monetary policy – and the surge in debt to deal with the Covid-19 shock – is likely to pile political pressure on central banks to keep interest rates low even when inflation picks up.

Price predictions. Markets have been skeptical of the Fed's ability to generate inflation in the past, said one BlackRock fixed income portfolio manager.  They may need to see realized inflation move higher before pushing up inflation expectations. Many of the pre Covid-19 dynamics that were holding inflation down – such as demographics and inequality – are still in place, said a senior economist. Others saw secular trends such as tech disruption keeping inflation subdued in the medium term. Yet overall, we see inflation risks as skewed to the upside.

Higher inflation is not yet reflected in market prices, opening a window of opportunity for long-term investors concerned about inflation risks. Inflation-linked bonds offer potential insulation against a higher inflation regime. We also like real assets (such as real estate) as potential diversifiers and sources of resilience. Quality equities, including companies with strong market positions and ability to pass on higher costs, are best positioned to weather higher inflation, in our view. See our latest Weekly commentary for more.

Stay ahead of markets with the latest insights from the BlackRock Investment Institute.

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