Not all inflation expectations are equal – Pioneer

Added 21st November 2016

The sharp jump in global inflation expectations since Donald Trump’s US election success papers over several significant differences in the inflation path for different countries, said Tanguy Le Saout.

Not all inflation expectations are equal – Pioneer

According to Pioneer Investments’ head of European fixed income, while much of the increase in expectations of inflation stem from a belief that there will be a shift from monetary to fiscal stimulus in the US that will then be copied in other major economies, it is by no means assured.

Starting with the US, Le Saout cautions that it must be remembered that a lot of work will be needed before the president-elect can get his stimulus programme enacted.

But, he said: “The legacy of the Obama healthcare price increases and year-on-year effects means it is likely that the US headline inflation rate could accelerate north of 2.5% in Q1 2017.

"This will probably happen at the same time as the unemployment rate continues to gradually fall towards 4.5%, and may stoke fears that the Fed is indeed happy to let the economy 'run hot' for a period.”

United Kingdom

The UK, however, is a different beast altogether. Not only have the gaps between nominal gilt yields and inflation protection ones risen sharply already, implying the market is already discounting a substantial increase in UK inflation, but also, he said, the economic conditions in the coming months might not be as conducive to inflation as the market expects.

“The recent depreciation in the UK currency means there could likely be a short-term spike in UK inflation, but in our view UK domestic economic conditions over the next 12-24 months may not be conducive to a sustained pick-up in inflation,” he said.

Europe

In Europe, Le Saout said, the situation is a little more mixed.

“We anticipate a short-term spike in Euro-area inflation towards 1.5% in Q1 2017, but then it should fall towards 1% over the remainder of the year (assuming the oil price stays around its current level),” he said.

While Euro-area inflation breakevens in his estimation are close to fair value at present, one area that does look good value is the very long-end of the Euro inflation curve.

“30-year Euro-area inflation linked bonds still project that inflation will remain below 2% for the next 30 years, something we think is probably too pessimistic,” he said. 

Visitor's Comments Add your comment

Add Your Comment

We won't publish your address

About Author

Geoff Candy

Group digital editor

Geoff Candy joined Portfolio Adviser as News Editor in May 2014. He has been a financial journalist and broadcaster since 2005 and, in that time has worked in both South Africa and the Netherlands, covering everything from high street retailers and construction companies to mining and insurance.

Features

ANALYSIS: All stars aligned for European equities

ANALYSIS: All stars aligned for European equities...Lock icon

The fact that the Euro Stoxx 50 index recorded its largest one-day gain since July 2012 on Monday suggests the importance for investors of Emmanuel Macron’s victory in the first round of the French presidential...

Analysis

Profiles

Directories

Canada Life International Limited
Canada Life International...

Canada Life International Canada Life House,...

Tweets

Events

IA International Portfolio Bond & Financial Planning Forum 2017
IA Best Practice Adviser Awards UK 2017
IA Best Practice Adviser Awards UK 2017

Wednesday 3 May
The Waldorf Hilton, London

IA Product & Service Awards 2017
IA Product & Service Awards 2017

Wednesday 3 May
The Waldorf Hilton, London 

IA International Investment Forum Johannesburg 2017
IA International Investment Forum Johannesburg 2017

Tuesday 16 May
The Hyatt Regency, Johannesburg

Sponsored Content

Investment Strategy

OTHER STORIES FROM LAST WORD...