Chart of the Week: Everybody’s Changing

A client has asked what’s the biggest risk to markets this year?

In one word – inflation.

When it comes to inflation, what people expect can be just as important as what’s actually happening.

A recent survey in the US revealed something fascinating – a shift in inflation expectations. The University of Michigan asked individuals – who were asked to identify themselves as Republicans, Democrats or independents – where they expect inflation to stand in a year’s time. Previously, Republicans had the highest inflation concerns, but now Democrats' expectations have climbed while Republicans' have eased.

Why the switch? It often comes down to who’s in the White House. Historically, people tend to worry more about inflation when the opposing party is in power. But expectations are important and this shift in the view of Republicans could be a useful signal. If they’re correct, it suggests inflation could actually be cooling – and that’s exactly what the data is beginning to show.

Why expectations matter:

Inflation expectations shape reality

• Workers demand higher wages if they expect rising prices.

• Businesses increase prices to protect profit margins.

• Consumers rush to buy before costs go up.

‍This creates a self-fulfilling cycle – but the opposite is also true. When inflation expectations ease, companies and consumers adjust, reducing inflationary pressures.‍

What this means for investors:

Markets don’t just react to inflation data – they react to sentiment. As inflation expectations soften, bonds could stabilise and central banks may have more room to cut interest rates, providing a more favourable backdrop for markets.

This reinforces the importance of diversification. A multi-asset approach helps investors navigate shifting inflation narratives, balancing exposure to equities, bonds and alternative assets (such as infrastructure) that can perform in different environments.

Key takeaway:

Inflation isn’t just about numbers – it’s about psychology. And if expectations are a guide, inflation could continue to ease. In an uncertain world, a well-diversified portfolio helps you stay positioned for whatever comes next.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.