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Preparing for Higher Inflation

Key Insights

  • Inflation has remained at low levels for several years but is expected to rise in 2021 because of an anticipated increase in consumer spending.
  • We believe investors should consider including investments in their portfolios that could potentially benefit from higher inflation.

After remaining at low levels for several years, inflation expectations for the rest of 2021 have risen because of an anticipated release of pent‑up consumer demand in the U.S. and abroad. In our view, investors should consider adjusting their portfolios to prepare for this potential shift.

The coronavirus pandemic created dramatic changes in consumer behavior, and it meaningfully curtailed spending. At the same time, the U.S. federal government provided massive stimulus to replace lost wages. Consequently, U.S. consumers are expected to exit the pandemic with a remarkable savings glut, likely leaving them plenty of resources to draw from once they are safely able to spend (see left chart). A sudden increase in spending may lead to rising prices.

To gauge inflation expectations, investors can compare U.S. Treasury bond yields with yields on Treasury inflation protected securities (TIPS), shown in the right chart. While the anticipated inflation rate is relatively modest, it is notable because expected inflation levels have not been this high since June 2014. In our view, U.S. investors should not continue to expect the abnormally low levels of inflation seen over the past decade.

Given this expected shift, we believe investments that could potentially benefit from higher inflation may add value to an investor’s portfolio. These assets typically include value, small‑cap, and emerging markets equities; while within fixed income, TIPS and floating rate loans may be attractive options. “Real assets”— which include natural resources and real estate equities—also appear to be good alternatives as these assets have the potential to maintain or gain value during periods of high inflation.

Inflation Expectations Are Rising

Anticipated increase in spending points to higher inflation

Inflation Expectations Are Rising

Past performance is not a reliable indicator of future performance.
Sources: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. U.S. Bureau of Economic Analysis/Haver Analytics. Bloomberg Barclays (See Additional Disclosures).


This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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