Asset Allocation Insights
Should Rising Inflation Be a Concern?
Tim Murray, CFA Capital Markets Strategist, Multi-Asset Division
Key Insights
  • High inflation over an extended period has typically been a headwind for stock and bond investors.
  • Although markets appear to assume the current inflation spike will be temporary, durable increases in housing costs and wages could defy those expectations.

Inflation is rising, but the market-implied 10-year-forward inflation expectation for most developed market countries remains relatively muted, reflecting widespread assumptions that the inflation spike may prove temporary (Figure 1).

For financial markets, elevated inflation for an extended period could be problematic. Higher inflation typically brings higher interest rates, and, given their sensitivity to rising rates, bond markets would likely sell off. Also, significantly higher inflation historically has depressed equity valuations (Figure 2), a potential headwind for stocks. In such an environment, higher correlation between stocks and bonds could diminish the diversification benefits of a balanced portfolio.

We expect inflation to be higher than it has been over the past decade but not high enough to be a major concern. Recent results have been heavily influenced by extreme price hikes in categories that experienced a sudden stop and restart due to the pandemic, such as used cars and travel. We believe these trends are likely to moderate in the near term. Further, as seen in Figure 2, the recent inflation spike does not appear to have depressed equity valuations, likely reflecting the expectation that it will prove transitory.

Going forward, we are closely monitoring housing costs—a significant component of consumer prices—and wage inflation. Housing costs have been rising steadily for the past decade, a trend heightened by increasing work-from-home arrangements. Meanwhile, higher wages have historically led to price hikes as employers sought to offset rising labor costs. Durable increases in these two components could, in our view, generate more sustained inflation.

Rising Inflation

Will the inflation spike be temporary?

(Fig. 1) Market-Implied 10-Year Core CPI* for G10 Countries (as of June 2021)
(Fig. 2) Price/Earnings (P/E) vs. Inflation (December 1978 to June 2021)

*Core Consumer Price Index (CPI) is the CPI excluding energy and food prices.
**Line represents the market-implied inflation expectations for the next 10 years.
Sources: Bloomberg Finance L.P./Haver Analytics. Russell. See Additional Disclosures. T. Rowe Price analysis using data from FactSet Research Systems Inc.
All rights reserved. See Additional Disclosures.

Additional Disclosures

Financial data and analytics provider FactSet. Copyright 2021 FactSet. All Rights Reserved.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2021. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license.  All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication. The LSE Group is not responsible for the formatting or configuration of this material or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of September 2021 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual future outcomes may differ materially from any estimates or forward-looking statements made.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc.

© 2021 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

Tap to dismiss

Preferred Website

Do you want to go directly to the Financial Advisors/Intermediaries site when you visit ?