Inflation remains above Central Banks’ targets



Article | January 2023 | 4 minute read

Inflation remains well above Central Banks’ targets , and it’s not just another news headline. From the grocery store to the gas station, everyone has been confronted by the stark reality of higher and higher prices.

The inflation rate is most commonly measured by changes in a price index known as the Consumer Price Index (CPI). CPI is a measurement developed and used by economists to track the price changes in a generic "basket" of goods and services that consumers typically buy.

Since the middle of 2021, inflation has been continuing far beyond our local supermarkets and has cemented itself globally, with Consumer Price Indexes exceeding Central Banks’ targets across the board. 2022 marked the end of an era of low inflation and suppressed interest rates1.

Key drivers of inflation

The world is currently experiencing multiple inflationary shocks at once, as an already disrupted supply chain (due to COVID-19) faces increased commodity prices.

The main contributing drivers of inflation can be summarised across 4 key dimensions:

1. Geopolitical tensions

Geopolitical tension between Russia and Ukraine added significant inflationary pressure. Russia is a key exporter of oil, natural gas, and other commodities, and the country’s exclusion from global supply chains contributes to elevated prices.

2. Supply-chain restructuring

Even before the onset of the Russia-Ukraine conflict, inflation was already building up due to the COVID-19 pandemic and resulting lockdowns. The second half of 2021 and 2022 have been marked by high shipping prices and heavily disrupted supply chains. In combination with an ongoing wave of re-shoring, restrictive trade policies, and general geopolitical tensions, inflation has remained high as producers continue to pass higher prices through to end-consumers.

3. Psychological dimension

Furthermore, inflation also has a critical psychological dimension that depends on forces of memory, forgetfulness and policymaker’s behaviour. While consumer demand and labour markets remain strong – especially in the United States - investors should be aware of the wage-inflation loop, which may become self-fulfilling1. This loop emerges from the demand for higher wages in a tight labour market, where companies resort to passing these increased (wage) costs onto their consumers.  The Fed has been able to keep inflation expectations anchored with its aggressive stance. Expectations are that while still high inflation should decrease throughout 20231.

4. Structural factors - Greenflation

The ongoing push to transition to a more sustainable global economy has been accelerated by a recent focus on energy security, but will likely require significant labour and physical resources - including various scarce materials and commodities. This demand for commodities, coupled with the still limited renewable energy production capacity, can contribute to further inflation through higher energy bills and commodity prices.

Rethinking portfolios to account for inflation risk

Understanding the drivers behind inflation enables us to soundly rethink our investment portfolios, seeking better preparation for the long-term. Higher-yielding asset classes can warrant above-inflation returns and, often, they can be found across alternative asset classes. Therefore, we believe that a broad-based investment approach - that goes beyond the traditional benchmark approach - will be paramount.


1 Inflation remains above Central Bank Targets: Portfolio strategies in inflationary times, Amundi, December 2022. 

Important Information

Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of end of December 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.

Date of first use January 2023

Doc ID: 2676146