Inflation cheat sheet: Key facts, figures and definitions
US record ‘megadrought’, a menace to food security
The US experienced its worst recorded drought in decades this summer. At its height, the unprecedented aridity extended across more than two-thirds of the continental area of the United States, with its most severe manifestations in the Southwest, but also extending to Oregon, Washington and North Dakota.
Click the icons below for quick answers to some of the most common inflation questions.
Inflation has been on the rise in much
of the developed world
Consensus CPI forecasts Source: Consensus Economics. Data as at June 2021.
A booming US economy has pushed
up US inflation in particular
Headline CPI was up 5.4% from
June 2020 to June 2021. And the
three-month annualised core inflation
rate was up 10.6% between March
and June 2021 – the highest reading
Part of the global inflation surge is
due to the “base effect”
Inflation was so low in early 2020 due to
the coronavirus crisis that any increase
will appear to be large. But the consensus
view is that other factors are pushing up
inflation over the short term.
3 factors pushing
inflation up over
the short term
Economic activity has been picking up, and
the output gap is getting smaller. This is an
The Covid-19 pandemic disrupted
the flow of goods around the world –
from lumber to semiconductors. When
these items are harder to find, price
inflation is not far behind.
Rising oil price
WTI hovered around USD 75 per barrel
in July 2021, just over a year after
reaching negative territory early in the
pandemic. The oil price is key to long-term
3 factors pushing
inflation up over
the long term
Central banks have flooded the
banking system with liquidity, and the
money supply is outpacing the growth
in economic output. Plus, central banks
have implied that they are willingly
staying “behind the curve”.
International trade (which tends to be a
price equaliser) is losing steam. Countries
are also seeking to be self-sufficient with
essential goods, which could push prices
up as countries compete with each other
for raw materials.
Changing labour force
The wage share has been growing for
some time, giving workers more money
to spend on goods and services.
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
A moderate amount can also be good
for the stockmarket, 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
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”
In just 10 years, 3% inflation could shrink an asset’s value by
more than 25%
Effect of 3% annual inflation rate on initial EUR 100,000 hypothetical
investment Source: Allianz Global Investors. Hypothetical example for illustrative purposes only.
Save more and invest earlier
Given that any level of inflation
will shrink your future purchasing
power, one of the best ways to
combat inflation is to save more
and invest earlier. This gives
your portfolio the opportunity to
take advantage of the power of
Look at what your investments
are yielding after inflation is
Instead of just focusing on an
investment’s nominal yield, look
at its real yield. For example, if the
nominal yield on a bond is 3%, but
the inflation rate is 2%, the real yield
is 1%. With many nominal yields at
or near historically low levels, some
real yields can even be in negative
territory. Over time, this means
inflation could cause some investors
to lose money.
Consider inflation-hedging assets
Inflation-linked bonds – such as Treasury inflation-protected securities in
the US and gilts in the UK – directly benefit from rising inflation expectations,
since they are designed to help protect investors from inflation.
An active fixed-income investor can seek returns regardless of the inflation
environment – which is critical given the uncertain inflation outlook.
Equities have historically provided good returns when inflation is moderate –
in part because reasonably higher prices can lead to higher earnings for
companies, and investors tend to pay more for earnings growth.
During periods of higher inflation, commodities and gold have historically
done very well.
Institutional investors may want to consider private-market assets to hedge
against – or even benefit from – a sustained return to inflation.
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.
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.
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.
West Texas Intermediate crude oil (WTI): one of the standard ways to track oil prices.
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