UPDATES FROM THE PATH

Is inflation transient or permanent?

Sep 16, 2021
  • BlackRock

The topic of inflation is top of mind for plan sponsors and participants as they consider how today’s inflationary pressures will impact their retirement savings.

LifePath® research on inflation

Nick Nefouse, Head of Retirement Solutions and Global Head of LifePath, discusses recent research into the impact of inflation across people's ages and how we incorporate that into the LifePath portfolios.

Thank you for tuning in to Updates from the Path. For this latest piece what we wanted to do is focus more on inflation. Pretty much every meeting we've done over the last three, even six months, the question of inflation has come up. And the simple question is, is inflation transient or is it permanent?

So we wanted to do is go back to some research that we did in 2019 before the latest bout of inflation really came up. And what we did in 2019 is looked at inflation's impact on different people's ages. So the idea was not to just look at inflation's impact on assets, but what we wanted to do is understand how inflation impact a 25-year-old, for example, versus a 55-year-old, and then how do we incorporate that into the Life Path portfolios.

There was two key findings from the inflationary work that we did. The first one really had to do with asset classes, and that's the longer you hold an asset class, the more likely it is that asset class will outpace inflation. This was pretty well known within the industry. But the second piece we found much more interesting. And that's that wages pass through inflation at a very high rate. Put simply, if we look at rolling one year periods, wages outpace inflation about 72% of the time. So what that means is wages offer a very good natural hedge against increasing inflation. If you think about this anecdotally, right now, just even within the media, you see lots of companies increasing wages as inflation is increasing. So you can see this pass through already happening.

So the question is, how do we incorporate this research into our portfolios? If we break the research up into two different groups, think of a young worker versus an older worker nearing retirement. The young worker has a very long time horizon, but they have very low amounts of assets saved because they've just starting to work. So importantly, we have to understand their wages. And what we found in our research is the wages of young workers, especially young workers, really pass through these increases in inflation. So the primary driver of a young worker's outcome is going to be their wages and this increase in wages is a huge help to fight off inflation.

For older workers, it's a little bit different. And the reason for that is older workers have less time to spend working. So they have less wages coming in. Think of somebody in their late 50s or their early 60s. They should have higher amounts of assets or money saved for retirement. So we have to take a little bit of a different approach for those older workers. And this is where we start to include in inflation-fighting asset classes, things like treasury inflation protected securities. These securities will protect both short and intermediate term inflation that helps protect those asset classes because for the older workers what we're trying to do is get them ready to spend in retirement.

Finally, we just want to remind everybody that Life Path is built is a long horizon product. So what we wanted to do is take long horizon research and apply it to a long horizon product. So going back to the initial question, is inflation transient or permanent, for Life Path it doesn't really matter. For our young workers, they can withstand a lot of these inflationary pressures because of their wages and their time horizon. And for our older workers we've built in about nine percentage points of inflation fighting asset classes into their asset allocation to ensure they will have some level of stability into the future.

 

 

 

So thank you for taking the time to listen. We've included all of our inflation research on this web page, so you can click there and read through the extensive work that we've done, both in 2019, as well as some papers more recently. Thank you very much for watching, and we'll see you next quarter

Thank you for tuning in to Updates from the Path. For this latest piece what we wanted to do is focus more on inflation. Pretty much every meeting we've done over the last three, even six months, the question of inflation has come up. And the simple question is, is inflation transient or is it permanent?

So we wanted to do is go back to some research that we did in 2019 before the latest bout of inflation really came up. And what we did in 2019 is looked at inflation's impact on different people's ages. So the idea was not to just look at inflation's impact on assets, but what we wanted to do is understand how inflation impact a 25-year-old, for example, versus a 55-year-old, and then how do we incorporate that into the Life Path portfolios.

There was two key findings from the inflationary work that we did. The first one really had to do with asset classes, and that's the longer you hold an asset class, the more likely it is that asset class will outpace inflation. This was pretty well known within the industry. But the second piece we found much more interesting. And that's that wages pass through inflation at a very high rate. Put simply, if we look at rolling one year periods, wages outpace inflation about 72% of the time. So what that means is wages offer a very good natural hedge against increasing inflation. If you think about this anecdotally, right now, just even within the media, you see lots of companies increasing wages as inflation is increasing. So you can see this pass through already happening.

So the question is, how do we incorporate this research into our portfolios? If we break the research up into two different groups, think of a young worker versus an older worker nearing retirement. The young worker has a very long time horizon, but they have very low amounts of assets saved because they've just starting to work. So importantly, we have to understand their wages. And what we found in our research is the wages of young workers, especially young workers, really pass through these increases in inflation. So the primary driver of a young worker's outcome is going to be their wages and this increase in wages is a huge help to fight off inflation.

For older workers, it's a little bit different. And the reason for that is older workers have less time to spend working. So they have less wages coming in. Think of somebody in their late 50s or their early 60s. They should have higher amounts of assets or money saved for retirement. So we have to take a little bit of a different approach for those older workers. And this is where we start to include in inflation-fighting asset classes, things like treasury inflation protected securities. These securities will protect both short and intermediate term inflation that helps protect those asset classes because for the older workers what we're trying to do is get them ready to spend in retirement.

Finally, we just want to remind everybody that Life Path is built is a long horizon product. So what we wanted to do is take long horizon research and apply it to a long horizon product. So going back to the initial question, is inflation transient or permanent, for Life Path it doesn't really matter. For our young workers, they can withstand a lot of these inflationary pressures because of their wages and their time horizon. And for our older workers we've built in about nine percentage points of inflation fighting asset classes into their asset allocation to ensure they will have some level of stability into the future.

 

 

 

So thank you for taking the time to listen. We've included all of our inflation research on this web page, so you can click there and read through the extensive work that we've done, both in 2019, as well as some papers more recently. Thank you very much for watching, and we'll see you next quarter

Updates from the Path

Subscribe to get timely insights on LifePath’s investment approach every quarter.
For Financial Professionals Only.
Please try again
First Name *
Please enter a valid first name
Last Name *
Please enter a valid last name
Email Address *
Please enter a valid email
Company *
This field is mandatory
Thank you
Thank you
Thank you for your subscription
Updates from the Path
Get timely insights on a broad range of issues that inform our research and investment approach for LifePath every quarter.
Thumb DC Updates From Path