The first estimates of May’s figures show very clearly that overall inflation has accelerated after several months of stability, proof that the ECB’s accommodating policy is being efficient. After the publication of the Spanish inflation in acceleration of +2.1% over one year, and that of Germany with +2.2% in May, it is the figures of the inflation of the euro zone which finally reach the official objective of the European Central Bank.
Indeed, the inflation rate accelerated faster than expected in May, rising from +1.2% in April to +1.9% year-on-year. Not surprisingly, it should be noted that the energy-related base effects were particularly strong and are expected to continue until the summer. This is likely to fuel the debate on when it is most appropriate for the ECB to normalize its monetary policy, especially as oil-related base effects start to influence and inflate consumer prices’ figures.
One more reason for the most rigorous governors, including Jens Weidmann, the head of the Bundesbank, to call for the quantitative easing program to end this year, and for key rates to rise again in mid-2019. However, some observers point to a slowdown in economic growth in the euro area and market turbulences due to the Italian political crisis is likely to be felt.
The situation is paradoxical: if inflationary pressure persists, the ECB could be confronted with a stagflation shock, an accelerating inflation rate while growth threatens to slow down. We are not there yet, of course, but the time has come to protect ourselves against this new scenario.
In terms of allocation, the inflation theme enjoys a more favorable momentum in the euro zone, investment on a pure "breakeven" exposure should be favored in this context, while immunizing the theme against increased volatility on interest rates.
However, it is advisable to invest in instruments without any rate risk so as not to suffer from the end of the accommodating policies in the coming months. These investments on inflation expectations without interest rate risk are the main diversification lines of CPR AM’s diversified fund range in the current context.
