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Will Central Banks Cause Inflation? 

Stefan Hofrichter 



Chief Economist Stefan Hofrichter explains that while there has been little short-term inflationary pressure of late, the policies of central banks around the world may be working in conjunction with other non-monetary forces.

Inflation has recently been sticky and has surprised on the upside

Since the bursting of the housing bubble in 2008, inflation rates have remained surprisingly high around the world—both in the US, even though the US economy has been rather weak, and in Europe, even though European economies have been less than robust.

Developed-world inflation expectations are still anchored at around 2%

Inflation has surprised economists and market participants on the upside since 2000; consensus inflation estimates have been roughly 30 basis points too low, both for the US and for developed markets.

In the near term, we see little inflationary pressure

Inflation expectations have remained stable. Households and professional forecasters expect inflation to remain at about 2.5% in the US and 2% in the euro area.

In the medium to long term, inflation could start to edge up

While we do not expect inflation to be a problem in the next 12 to 18 months, inflation risk is rising in the medium to long term. If central-bank balance sheets and lending to the financial system continue to expand, long-term inflation expectations are likely to rise for a number of reasons:

We believe we are gradually seeing the beginnings of a regime shift in global monetary policy.

Central banks are likely to continue to maintain an accommodative stance—probably for too long, in our opinion.

As a consequence, households and companies may adjust their inflation expectations upward.

Central banks are likely to remain behind the curve

We see four key reasons why inflation is more likely than deflation:

Political pressure: Monetary policy will become increasingly intertwined with fiscal policy.

The exposure of central banks to sovereign bonds heightens the risk of an eventual bond-market crash.

Central banks want to avoid the deflation that has long afflicted Japan's economy.

Central banks have little experience in identifying asset bubbles.

Long term, non-monetary factors could also lead to inflation

The growth of labor forces in China and Eastern Europe has peaked.

Re-regulation of markets is likely after a long period of deregulation.

Renewed protectionism is a risk after a long-term trend of declining trade barriers.

Introduction of new taxes is likely in an attempt to improve budgets.

Equities are an imperfect hedge against inflation

Developed-market equities have historically functioned as a hedge against inflation only when inflation rates have been at or below 4%. As long as inflation has been moderate, equities have outperformed bonds.

Investment implications

Risk assets (equities and spread products) should be preferred over sovereign bonds.

Inflation hedging will become more important.

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

The Standard & Poor's 500 Composite Index (S&P 500) is an unmanaged index that is generally representative of the U.S. stock market.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585,, 1-800-926-4456.


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