Inflation: What factors can lead to price increases?

Low inflation despite monetary easing. A look at the main factors and expectations.

Monetary easing and stimulus measures have recently helped the economy recover, but a great deal of uncertainty remains about inflation trends. What are the decisive factors? Read about some investments that could offer inflation protection.

What factors influence inflation?

Inflation is what happens when prices increase within a currency region. It can result, for instance, when consumer demand is high, or when the provision of goods and services becomes more expensive due to price increases in raw materials and wages.

It is widely believed that an expansionary monetary policy triggers inflation. Over the past 12 years, the Swiss National Bank (SNB) has printed over CHF 600 billion. And yet, after Japan, Switzerland has the world's lowest inflation rate. This observation suggests that the connection between monetary easing and inflation is only indirect. What factors have an effect on price levels instead?

Global inflation rate and trend

Source: Refinitiv, Bloomberg, Credit Suisse, April 21

Past performance is not a reliable indicator of current future results.

Three global trends keep price increases stable

  1. Demographic change: Starting in the 1980s, Baby Boomers accounted for such a large share of the workforce that there tended to be fewer jobs available than workers. Furthermore, the opening of China and the fall of the Iron Curtain brought more than a billion people into the global labor market. Wage levels therefore hardly stood a chance of increasing noticeably.
  2. Expanding globalization: The growth in worldwide commerce increased the availability of goods and services, ramping up competition.
  3. Advancements in technology: These have recently picked up pace and will continue to do so.

Global trends in monetary easing are on the rise: 2008 vs. 2021

Central banks and governments have provided the market with a tremendous amount of liquidity and passed unprecedented stimulus packages to prop up their economies. In 2008, the amount of assistance provided by the US was 3.5% of its economic output at the time. Last year, the figure amounted to just under 10 times as much, corresponding to one-third of the estimated US gross domestic product for 2021.

Global stimulus packages as of April 2021

Sources: McKinsey & Company,, Credit Suisse, April 1, 2021

While households have received their stimulus checks, they have put aside a large portion of them as savings due to the lack of spending opportunities during the various lockdowns. The result has been that households around the world in 2020 have, on average, accumulated significantly more savings than they did in the years from 2000 to 2019.

On the one hand, those reserves are strengthening households' ability to withstand another crisis. On the other, there are differing opinions about the extent to which inflation is being driven by future spending using those savings.

A comparison of global household savings rates

Source: OECD, Refinitiv FT, Credit Suisse

Monetary easing will continue

In light of the current economic situation, the Federal Open Market Committee (FOMC) says it will maintain its expansionary monetary policy until economic recovery has made further progress. Credit Suisse's experts are anticipating that the economic recovery, job creation, and inflation will grow stronger.

The continuing vaccination campaigns will kick-start economic activity. As a result, the supply side, which is experiencing bottlenecks caused by the pandemic, will be subjected to a stress test. There remains considerable uncertainty regarding the growth of inflation over the rest of the year, but the upside risks outweigh that.

Investing in commodities may offer protection against price increases

For 2021, inflation in Switzerland has been forecast at 0.3% (up from -0.7% in 2020). At present, commodities are an asset that may offer inflation protection. In spite of everything, the asset class should generate attractive returns over the medium term. On balance, commodities should benefit from the fact that national economies will continue recovering from their pandemic-related recessions thanks to accommodative monetary and budgetary policies. Furthermore, commodities are likely to protect against sudden inflation shocks, as gold has impressively demonstrated in the past.

The assessment of the fixed-income market also remains unchanged. Government bonds continue to be unattractive, while credit spreads on high-yield and investment-grade bonds are not especially enticing, either. In contrast, hard-currency bonds from emerging markets offer an interesting yield pick-up. When it comes to currencies, there is a preference for cyclical currencies and those from countries rich in raw materials.

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