The Lexington Group Tokyo New York Asia Financial Services: The best way to protect against inflation is to invest in assets

Just over a year ago, the International Monetary Fund (IMF) called inflation “the dog that didn’t bark” in reference to the remarkably stable rates of consumer price inflation in the wake of the 2008-09 financial crisis. One year later, that dog remains silent. But as any dog owner knows, assuming it stays that way can be a bold assumption. It is important that investors do not become complacent in the face of changing fundamentals. In both the US and the Eurozone, inflationary dynamics are becoming more challenging, albeit in different ways.

Improved employment in US could lead to greater inflation

In the US, continued improvement in employment data has reduced spare capacity in the labor market, which suggests we should see greater inflation and capital expenditures this year. The market’s focus on rising Fed rates is likely to intensify and should result in higher Treasury yields and a stronger US dollar.

The Eurozone is flirting with deflation

Meanwhile, the Eurozone’s flirtation with deflation has, in our view, transformed the perceived limits of European Central Bank (ECB) policy, similar to when the Outright Monetary Transactions (OMT) program was announced during the 2012 sovereign debt crisis. At the most recent ECB press conference, President Mario Draghi opened the door to an asset purchase program should inflation expectations become unhinged. This willingness to consider quantitative easing, which now seems implicitly supported even by the German Bundesbank, provides an additional layer of “insurance” to the Eurozone’s economic growth and corporate health.

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