Against a backdrop of tumbling sterling and anticipations of strong growth from the US – led by policy announcements from the new President – talk of a period of higher inflation has come to the forefront of investment discussions.
"Are we now seeing inflation being driven upwards by economic drivers rather than by policy-makers? "
Whether we are entering a period of higher inflation is an important issue for pension schemes, for whom a significant proportion of their liabilities are linked to either the retail prices index (RPI) or the consumer prices index (CPI).
We last discussed inflation in our April 2014 Quarterly Insight, ‘Inflation or deflation – which should we fear the most?’ Our conclusion at the time was that deflationary forces were increasing but, whilst sounding contradictory, we still feared inflation due mainly to the temptation of policy-makers ‘inflating away’ their debts.
Three years on, has our view changed and are we now seeing inflation being driven upwards by economic drivers rather than by policy-makers? In this paper we investigate whether the recent heightened level of inflation is expected to stay and what the investment options are for pension schemes that wish to protect against such a scenario.
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