The first quarter of 2021 brought inflation — or at least the fear of it — back into focus. Continuing the trend that started in November 2020 following good news on COVID-19 vaccines, inflation expectations (measured by breakeven inflation) and intermediate- to longer-maturity government bond yields have been rising across the globe. The long-term implications of the pandemic will take a while to be fully understood. Within Mercer, the never-ending debate between our inflationistas and deflationistas continues to rage, with both camps making compelling cases. To help you navigate how inflation might affect your investment portfolio and possible steps to take to mitigate, below you’ll find our latest thinking on the return of inflation. If you would like to discuss in more detail contact our team who will be happy to help you.
Arguments for both inflation and disinflation are compelling. We carefully consider both sides.
 Referring to inflation expectations implied by the market, breakeven inflation is calculated by taking the difference in the yield for nominal and inflation-linked bonds of equivalent maturity. As nominal bonds compensate for an expected level of inflation, and inflation-linked yields pay the investor the actual realized inflation, the difference between the two reflects the inflation expected by market participants of the stated maturity.
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