Q2 2013 Inflation Monitor: We Expect Inflation to Remain Contained in 2013, But Beware of Complacency

Our Global Macro Strategy Team believes U.S. inflation should remain contained in the near term, but monetary stimulus could contribute to long-term inflation pressures. See what indicators we’re monitoring.

Download the full PDF with our inflation scenarios, expectations and other data.

We Expect Inflation to Remain Contained in 2013, But Beware of Complacency

  • U.S. inflation was lower in 2012 than in 2011, and we expect it to remain largely contained in 2013. The 12-month change in overall (“headline”) U.S. inflation, as measured by the Consumer Price Index (CPI), was 1.7% in 2012 compared with 3.0% in 2011. A significant deceleration in price increases for food, energy, apparel, and new vehicles was largely responsible for the decline.
  • We believe another 1.5–3.0% increase in the CPI is the most likely scenario in 2013. This view is based on the global economic slowdown that affected 2012 and has carried over into early 2013, particularly in Europe. Slower economic activity, as well as significant lingering political and economic uncertainties that continue to constrain growth, have helped contain both cost-push and demand-pull inflation pressures.
  • We remain concerned about complacency, however. Potential monetary-driven inflation continues to be a long-term threat because of the aggressively stimulative monetary policies of the world’s central banks. Monetary stimulation was a major theme in 2012 (it helped push equity markets higher), and it continues into 2013, raising long-term inflation risks. Inflation surprises can be particularly damaging to financial assets. We believe strongly that some level of inflation protection be incorporated in investor portfolios.

Inflation Still a Longer-Term Concern as Massive Monetary Stimulus and Budget Deficits Continue

  • We believe higher inflation (a CPI change exceeding 3% over a 12-month period) will likely occur within the coming three- to five-year time frame. We think it will most likely result from the unprecedented monetary and fiscal policies enacted in response to the 2008 Financial Crisis and the 2012 global economic slowdown.
  • In December 2012, the U.S. Federal Reserve (the Fed) extended its historically low short-term interest rate target and its previously announced bond-buying programs designed to keep long-term interest rates low. The Fed clearly appears more concerned about preventing another recession and significantly reducing the U.S. unemployment rate than about inflation, and seems willing to risk future inflation to boost current economic and employment growth.
  • Meanwhile, fiscal budget deficits in the U.S. and across the developed world remain higher than ever. Governments have responded to this challenge with currency devaluation and monetization of debt, both of which are inflationary.

The opinions expressed are those of the Global Macro Strategy Team at American Century Investments and are no guarantee of the future performance of any American Century Investments fund. This information is for educational purposes only and is not intended as investment advice.