The rise and fall of inflation

The rise and fall of inflation has arguably been the most important determinant of asset returns in recent decades. Its future evolution is likely to be of great importance for pension fund funding, and yet we would argue that inflation is not well understood. Pension funds are long-term investors – the key conclusion from investment results is that short-term dynamics should not be completely ignored in the belief that the equity market will prove to be a perfect inflation hedge in the long run.

When inflation falls relative to the previous period, assets generally perform well. Persistently rising inflation has been bad for asset returns – both in nominal and real terms.

For pension funds, inflation has a strong impact on assets and liabilities as well as benefits for the pension fund membership. Analysing historical data on inflation and its components is therefore very important. It is also worth comparing this data with developments in other countries.

The situation in Switzerland is more stable compared to other countries.

Core CPI

Food CPI

Energy CPI

Headline CPI vs GDP

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