Company: Royal Bank of Scotland (RBS)
Category: Inflation Derivatives
Published: 03 May 2011
The global financial crisis that began in 2008 has generated an extremely unstable environment, particularly for inflation. While the range of inflation outcomes was relatively predictable in the years before the crisis, uncertainty in inflation forecasting has increased dramatically. Inflation trends in advanced economies have been volatile with no clear direction and sentiments have shifted quickly. The headline news switched from “Fears of a 1970s-style stagflation are back in the air” in 2008, to “Developed economies could get trapped in a limbo land of zero inflation” in 2010, and then “Inflationary pressures are building around the world” in 2011.
There are good reasons to believe in a deflationary environment: various measures show slack and spare capacity in the economy yet, simultaneously, quantitative easing has raised the spectre of fiscal debt monetisation, blurring the lines between fiscal and monetary policy, encouraging fears of inflation or even hyperinflation. Assessing the inflation risk and its possible implications on different asset classes is clearly a complex task.