All Asset All Access: Investment Implications of Inflation Expectations


  • In Research Affiliates’ view, U.S. inflation expectations (as measured by breakeven inflation rates) are likely to rise. Shelter prices are one contributor; for example, historical trends suggest a continuing rise in owners’ equivalent rent over the coming year.
  • On average since their inception, the real-return-oriented All Asset strategies have demonstrated positive historical return correlations to changes in U.S. inflation expectations.
  • Research Affiliates’ global business cycle model incorporates select country-specific indicators to forecast the probability of an economic slowdown. These probabilities are then mapped to Research Affiliates’ short-horizon return estimates for asset classes, and these signals in turn may inform portfolio tilts.

In this edition, Rob Arnott, chairman of Research Affiliates, shares his views on U.S. inflation expectations and explains why changes in inflation expectation levels are important when considering the return prospects of the All Asset strategies. Omid Shakernia, senior vice president of the multi-asset strategies team at Research Affiliates, delves into the business cycle model of the All Asset strategies and shares how that model, along with other tactical signals, informs the positioning of the All Asset strategies. As always, their insights represent Research Affiliates’ views in the context of the PIMCO All Asset and All Asset All Authority funds. All Asset All Access is published quarterly.

Q: Why do you think U.S. inflation expectations will continue to rise in the near term?

Arnott: The price of anything is a matter of supply and demand. When people stop spending for a few months, for example because of pandemic lockdowns, and their bank accounts are supplemented by stimulus checks (whether they need the money or not), demand would be expected to go up. A jeweler friend of mine calls it “The Itch.” If supply chain disruptions constrict supply, and people choose to stay home and not work (whether because generous benefits make this possible or because they are concerned about the risks of the pandemic), supplies would be expected to shrink. These forces in turn should tend to push up prices of consumer goods, services, and financial assets. As Ben Graham famously opined in the 1940s, the stock market is a weighing machine in the long run and a voting machine in the short run. Liquidity forces, paired with simple supply and demand, tend to allow inflation to spill over into financial assets.