What a bout of deflation would mean for asset returns

This Focus examines the implications of deflation for asset returns. It is motivated by the recent collapse in market-based measures of US inflation compensation amid the spread of coronavirus, to their lowest levels since the Global Financial Crisis (GFC). That collapse almost certainly exaggerated the change in investors’ expectations for inflation. And, in any case, it has partly reversed in recent days in response to the announcement of further policy stimulus. Nonetheless, investors still seem to be braced for a short-lived fall in the annual rate of change in the US consumer price index (CPI).