Latest fraudulent alert - last updated on Apr 2023. To find out more information and how to protect yourself, please click here.

Investment Institute
Fixed Income

What to know about inflation

  • 13 July 2022 (3 min read)
Inflation video series : Module 1 – What to know about inflation

What to know about inflation

Against a backdrop of squeezed supply chains, increased levels of demand as pandemic-related restrictions are eased and geopolitics, inflation has risen to levels not seen in some countries for over twenty years. With it likely to remain at high levels, it is important to remember the key elements about inflation and ways to mitigate against it.

What is Inflation?

Inflation is the term used to describe a rise in the general level prices.  As prices rise, people’s ability to purchase goods and services (known as purchasing power) falls.  How quickly prices rise is called the rate of inflation – it is quoted as a percentage and is measured on a monthly basis using price indices.  

When the rate of inflation is decreasing but is still positive we call it disinflation.  When the rate is negative (which means that prices are falling) we talk about deflation

Price indices use a “basket” of goods and services that people regularly spend money on such as food, transport and clothing.  The month’s prices are then compared with what it was a year ago to work out the current inflation rate.  According to its components there are two categories:

  1. core inflation which is more representative of the structural evolution of prices (excludes volatile elements such as  food and energy)
  2. headline which is the total inflation.  Inflation-linked bonds are linked to headline inflation which includes energy and food prices.

While calculation methods may vary across countries, the majority of mature countries, including the US and UK, use CPI (Consumer Price Index). In the European Union, all countries follow the same methodology called ‘Harmonised Index of Consumer Prices (HICP).

All these measures relate to realised, or past inflation.  However, when trading inflation-linked bonds, investors have their own forecast of what inflation will be in the future: market-based inflation expectations which is what we call “inflation breakeven”. Part four of this series, Market conditions and when to use inflation-linked bonds, will study this in more detail.

There are several factors that can cause inflation, money supply growth outstripping level of productivity, excess demand, rising costs, weak currency causing imports to be expensive, and even just the anticipation of inflation can cause inflation.

Whatever the cause, it no longer is a localised event. The old saying ‘If the US sneezes, the rest of the world catches a cold’ holds true for inflation as inflation is very correlated across countries. This is because of the globalization of the economy, global pricing of raw materials and the integration of economic cycles.

Global Inflation Rate
Source: AXA IM, Datastream. For illustrative purposes only

This means that when it comes to mitigating the effects of inflation, there is a diversification benefit in taking a global approach. On top of this, as can be seen in the chart below, global inflation-linked bonds can provide a better risk-adjusted return than many local inflation strategies.

Inflation Linked Bonds: 10-Year Risk / Return Picture
Source: AXA IM, Barclays as at 31/05/2022 – for illustrative purposes only. Developments of the past offer no guarantee and are no indicator for any future returns or trends.

As this module has shown, there are many different causes for inflation and a variety of measurements that can be used to calculate inflation.  It is worth investors reviewing the effects of inflation on their portfolio from a global perspective, not just their local market. With this in mind, the second in our series, Adding to the toolkit: inflation-linked bonds will look in more detail at inflation-linked bonds and how they can be used as an investment solution for offsetting the impacts of inflation.

Fixed income


Inflation can erode the real returns of investments however tools like inflation-linked bonds could help investors mitigate the effects of inflation on their portfolio.

Find out more

Watch the other modules from our inflation series

The objective of this series is to make inflation-linked bonds investing simple to investors.


    This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.

    All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone. 

    Some of the services listed on this Website may not be available for offer to retail investors.

    This Website has not been reviewed by the SFC. © 2023 AXA Investment Managers. All rights reserved.