The spike in inflation as the United States has emerged from its Covid-19 lockdowns has hardly come as a surprise. Its magnitude, however, has caused economists and investors to wonder whether the low-inflation environment that has prevailed for a generation has finally come to an end – and what it might mean for markets if it has.

AUTHORRonald Temple, CFA

Managing Director, Co-Head of Multi-Asset and Head of US Equity, Lazard Asset Management

Summary

• The spike in inflation as the United States has emerged from its COVID-19 lockdowns has caused economists and investors to wonder whether the low-inflation environment that has prevailed for a generation has finally come to an end.

• If inflation does remain above the Fed’s 2% target through 2022 and then stabilizes at or slightly above 2% thereafter, it will mark a major turning point for interest rates.

• That dynamic alone calls for investors to revisit their portfolio allocations sooner rather than later, with an eye toward fortifying inflation defenses and capitalizing on the opportunities inflation can present.

The spike in inflation as the United States has emerged from its COVID-19 lockdowns has hardly come as a surprise. Its magnitude, however, has caused economists and investors to wonder whether the low-inflation environment that has prevailed for a generation has finally come to an end—and what it might mean for markets if it has.

The last time the annual rate of inflation, as measured by the index of core personal consumption expenditures, exceeded 3% was 30 years ago, in 1991. And in the decade since the global financial crisis the rate of inflation has fallen too low, as evidenced by lower rates of real economic growth (Exhibit 1).

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