A Knock at the Door: The return of inflation

A Knock at the Door: The return of inflation

05-12-2019 | 年次アウトルック

Since the global financial crisis, one economic variable has stayed on our mind: inflation. In the aftermath of the crisis, it was experienced firsthand how destructive deflationary forces can be. Of course, financial markets have seen this before. The lessons drawn from the Great Depression and Japan have dictated the roadmap of central bankers over the last years. Now, 11 years after the Lehman default, it might be time to look for another course.

  • Jeroen Blokland
    Head of Multi Asset

Declining inflation is not a new phenomenon; inflation has been on a downward trajectory for decades. During its decline from initially high levels, the move downwards was seen as welcome. Central banks were hailed as having policies that were effective in keeping down inflation.

Inflation targeting, or a less explicit policy focus on inflation, was enshrined in most central bank mandates. Assets that tended to be more strongly linked to inflation massively underperformed traditional assets.

This article is part of our investment outlook 2020: ‘A Tale of Two Scenarios’.
This article is part of our investment outlook 2020: ‘A Tale of Two Scenarios’.
Read more

Inflationary assets massively lagged the market

Source: Bloomberg. Calculations: Robeco. The traditional portfolio invests in the S&P 1200 global index and US treasuries 7-10 years. The equal risk inflation portfolio invests in the S&P real assets equity index, US ILBs 7-10 years, UBS commodity (CIC) index and cash.


In the beginning no one dared to question the success of central bank policy when it came to keeping inflation in check. However, looking back now, it is hard to deny that maybe a part of the success of central banks should be attributed to large powers that were working their way in the background.

One of the major forces that brought down inflation is globalization. To us, globalization is the coalescing of several major developments, such as the rise of technology, China joining the WTO and the liberalization of cross-border financing. All these developments created a fertile ground for companies to outsource labor and to tap into new consumer markets.

As a consequence, global trade grew rapidly while inflation fell. Global developments steadily became an important driver for domestic economies. Of course, not every economy was affected in the same way and to the same extent. But even a relatively closed economy such as the US was impacted. This can be confirmed simply by looking at the share of imports in the GDP, which rose from 5% to 15% between 1970 and 2017.

Eurozone vs US inflation

Given our strong belief that globalization played a major role in inflation, why is it that the inflation numbers in the Eurozone and US differ so much? Shouldn’t the readings be more in line with one another? In practice, there is only a general consensus on how inflation should be measured. To a certain degree, this is correct, as inflation needs to reflect regional and domestic preferences. For instance, in the US, healthcare has a much higher weight than in the Eurozone.

Still, when we correct for these preferences, some odd variations remain. For instance, does it make sense for the US to include owner equivalent rents – which reflect the inflationary source of house prices – in its CPI when the Eurozone does not? If we calculated the US CPI based on the methodology used to calculate Eurozone inflation, the difference between Eurozone inflation numbers and US ones is considerably smaller than the official numbers suggest. Global drivers have indeed become an important driver for inflation.

Definition matters: US and euro area CPI indices

Source: Federal Reserve Bank of St. Louis (FRED database). Calculations: Robeco. Indices are rebased to January 2010.

A new roadmap

Over the past years, central banks have had difficulty turning deflationary forces around, fighting against forces outside of their control. We are at a turning point for globalization. The trade conflict between the US and China and of course Brexit demonstrate that globalization will no longer be a tailwind for deflation but more likely will turn into an inflationary breeze.

Central bankers will need a new roadmap and will not be unsettled by a more than welcome increase in inflation. They will likely continue their dovish policy; an ounce of prevention is worth a pound of cure. If this plays out, 2020 may well mark the turnaround in the decade-long fall in inflation. This will have a pronounced impact on financial markets and the gap between the performance of inflationary assets and traditional assets may finally start to close.

Outlook 2020: A Tale of Two Scenarios
Download the full 2020 Outlook


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