The situation is all the same no matter what price indicators you look at in recent years, such as the Consumer Price Index (CPI), the Producer Price Index, and the Personal Consumption Expenditures Price Index. In other words, prices have risen sharply, and all indicators show that U.S. inflation is at its highest level in decades. This inconvenience was also confirmed by the U.S. Consumer Price Index (CPI) in February, the highest since January 1982. In particular, investors are concerned that the survey was conducted before energy prices soared due to supply concerns stemming from Russia’s invasion of Ukraine on February 24.
Despite all these unwelcome news, we expect inflation to peak in the summer as inflationary pressures ease, with supply and demand narrowing, modest economic growth, and continued tight monetary policy by the Fed. In addition, by the end of this year, the core inflation measured by the Consumer Expenditure (PCE) Price Index, the Fed’s preferred price indicator, is expected to fall to 2.75% to 3.0%.
A core inflation level of 2.75% to 3.0% means that inflation is approaching the Fed’s target of 2.0%, and inflationary pressure is starting to recover to levels generally considered normal. But what happens if this outlook goes awry? What if the current high inflationary environment continues for many more years to come? How will it affect investors? Which group of assets can perform better in this environment?
This scenario is far from our basic scenario of easing inflation in the second half of this year, but it can’t be completely overlooked, so it would be appropriate to look at it from a contingency perspective.
So first, let’s look at what each asset group has done in the past high inflationary period.