Inflation Is High but Has It Peaked?

Through inflationary regimes, investors are encouraged to consider multi-factor investment strategies to bolster performance. Strategies such as the SPDR® MSCI World Quality Mix Fund (QMIX) support the State Street ETF Risk-Based ETF Model Portfolios in the current environment.

After a decade of inflation levels below 2%, financial markets are responding to surprises in CPI and the ongoing inflationary regime.

Inflation has driven the market narrative this year. While many expected the peak to have already occurred in the first half of 2022, US August CPI provided an upside surprise with respect to consensus expectations. The questions still remains, while inflation is high, have we seen the peak? A range of leading indicators suggest that disinflationary episodes may lie ahead. Indicating a reduction in the rate of inflation may be on the way.

1. Global supply chain issues are easing. These are the same indicators that in mid-2021 loudly signalled an inflation spike. These indicators are now sending a different message, but the Fed seems disinclined to listen. Because of this, the slowdown anticipated may be more intense than expected.

2. Recent data shows that consumer spending is slowing. For instance, real household consumption grew just 3.2% year on year during the first half of 2022, down from 7.9% in 2021. Part of the rationale for this is a normalisation in goods consumption following an abnormally big surge in 2021. It is likely that household goods consumption will continue to decline over the next two years and services consumption will moderate under the weight of declining real disposable income.

3. Decrease in commodity prices. Commodities are regarded as an inflation indicator and an inflation hedge. In 2021, we experienced a rapid rise in the price of commodities. Much of the retreat ahead can be attributed to lower oil prices, which have driven a reduction in transportation costs.

The New Inflationary Regime Favours a Balanced Factor Approach

While inflation is expected to slow in the near term, inflation is still likely to remain into 2023 at levels considered uncomfortable by central banks. Central banks look poised to continue battling inflation through swift and aggressive hikes. Such moves would result in collateral damage in terms of growth and employment. Therefore, we expect interest rates to remain higher for longer. In a volatile environment, factors such as high dividend, quality and low volatility may outperform the broad market index.

With equities typically being the largest allocation in an investor’s portfolio, and the largest source of risk, investors could consider a balanced multi-factor strategy, such as the SPDR MSCI World Quality Mix Fund (QMIX).

Against this backdrop, a strategy like QMIX can help to provide investors with exposure to the different factors driving markets. The inclusion of low volatility within the factor mix may help weather any spikes in volatility. Therefore, allocating to QMIX rather than a broad market index should support the State Street ETF Risk-Based ETF Model Portfolios in the current environment.

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