Global fund managers are most concerned about deflation in the coming year, according to Bank of America Merill Lynch.
While the collapse of commodities caused by a rapid decline in China’s economy was investors’ biggest concern last December, deflation wasn’t explicitly on their radar.
“Interestingly, at the end of 2013, investors had started to become uneasy about the risk of inflation,” wrote BAML’s Savita Subramanian in the firm’s US Equity Strategy Year Ahead for 2015.
But their concerns are quite different one year later.
The responses below from a separate poll question showed that investors are specifically concerned about deflation risks stemming out of the Eurozone.
The European Central Bank is struggling to fight off deflation, as several member countries have posted negative Consumer Price Index readings in recent months.
And while the US continues to post a positive CPI reading, the Federal Reserve recently expressed concern about inflation being below its 2% target. It remains something that they are watching closely in the run up to raising interest rates.
Personal consumption expenditures, or PCE — the Fed’s preferred measure of inflation — rose 2.2% in the third quarter. Bank of America forecasts core CPI at 1.8% for the fourth quarter of 2014 and for each quarter in 2015.
Here’s how Subramanian described their outlook for inflation in the US: “While other regions, such as Europe and Japan, are struggling to fight off deflation, US inflation remains in the sweet spot of 1.3% inflation, where market returns have historically been the strongest. While headline CPI may moderate and even temporarily fall below 1% due to commodity fluctuations, we expect core CPI to remain well above 1% over the next several years. Longer term inflation expectations retraced over the last few months to 1.9%.”
Deflation is a troubling phenomenon. While consumers might like falling prices, it encourages everyone to hold off on spending, which in turn leads to even lower prices. This causes economic activity to grind lower.
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