Article last updated 30 September 2025.
We all experience inflation and its consequences every day. Everyone buys goods and services; most of us earn either a wage or an income from our savings and investments; everyone ages; everyone lives in a globalised world, a world changing through technology and innovation. Yet understanding how all of these facets interact and the effect that they have on the prices we pay is not easy. Thankfully, since the high inflation of the ‘70’s and ‘80’s, inflation has become a slow-moving, stable trend. This paper examines those factors that might affect this trend over the next 20 years and concludes with a summary of considerations for investors across a range of inflation scenarios, and how they might be reflected in portfolio asset allocation.
Over the course of three chapters, ‘Under Pressure?’ asks:
Ageing – inflationary or deflationary?
‘Ageing’ is entering a new era, and so is its impact on inflation. As the age structure of a population changes so does its patterns of consumption, saving and investment. This influences inflation but in ways which can push it in opposing directions. Since the 1960s, the number of non-workers – the old and the young – has indeed shrunk relative to the number of workers. We call this the ‘dependency ratio’ (think, the old and young are dependent on the goods and services produced by those of working age). In other words, the number of producers has grown more than the number of consumers, and this stage of ageing is deflationary. But this is now reversing, and in some countries quite sharply. The dependency ratio troughed in the UK around ten years ago – from now on the pensionable population will grow more quickly than those of working age. A rising proportion of older people demanding goods and services from a declining number of workers should have an inflationary effect. By 2037, we estimate that the ageing process will increase the annual rate of inflation in the UK by 0.15%-0.23%.
Has globalisation lowered prices overall?
The popular consensus that globalisation has been – and will continue to be – profoundly deflationary is too simplistic. It’s come a long way, fast, but the process has already slowed right down. Since 2005, 98% of the world’s population has lived in a capitalist society, and over the last 35 years, the average tariff charged on imported goods between advanced economies has halved, tumbling by two thirds in developing nations. Global exports as a percentage of GDP has not shifted for the last decade, and the incentive for developed economies to offshore production has eroded. A new global workforce, lowering production costs and diminishing workers’ ability to negotiate higher wages in wealthier economies push down prices. On the flipside, however, as developing nations become wealthier, their consumption becomes greater, creating an offsetting, inflationary effect. The best estimates tell us that, contrary to popular belief, the net effect of globalisation on inflation is probably near zero. Where does this leave our central banks? Globalisation means they have less control of the forces that drive the domestic rates of inflation, and this has altered the relationship between unemployment, wages and prices. So it is perhaps no surprise that central bankers are turning their attention towards financial stability. In other words, if price shocks are now global in nature and they can’t prevent them, they can make sure that the buttresses are as sturdy as possible. Expect the regulation of financial services to become even more severe as a result!
Jobs and wages – still a consideration for inflation?
The link between employment and inflation is typically charted through what is known as the ‘Phillips Curve’, suggesting an inverse relationship between a country’s rate of unemployment and its wage or price inflation. This model seems to be breaking down as research, particularly in the UK and US, suggests that the ‘slope’ of the curve, which varies greatly over time, has tended to flatten over the last few decades. This phenomenon could be attributed to a number of factors: globalisation increasing the importance of a global cycle; inflation being better-anchored by more credible central bank regimes; the changing nature of work or simply that the Phillips Curve is difficult to specify.
Ed Smith, Rathbones’ head of asset allocation research, and author of the report, said, “Inflation is one of the most complicated and fiercely debated aspects of everyday personal finance. There is no shortage of views on what drives short-term price rises. For those seeking to plan for the long term, and invest accordingly to ensure they can meet their day-to-day expenses 20 years on, we need to dig a little deeper. Many of our clients have inflation-adjusted return (real return) targets. They want to generate a return over and above the rate at which consumer prices rise, preserving the purchasing power of their wealth and growing it or drawing an income from it. Over the next 20 years, we think inflation expectations are likely to remain well anchored, with any inflationary or deflationary impact from ageing, technological change or other phenomena, offset with monetary policy. To this end, a balanced, multi-asset portfolio, with equities at its core may be the key to superior risk-adjusted returns. Bonds are likely to struggle as interest rates rise, pressured by policy normalisation and demographics, so we favour diversifying assets instead. The biggest risk to this benign view is the prospect of technology-induced low inflation that central banks struggle to offset.”
The latest investment report on the long-term drivers of inflation can be accessed here.
Notes to editors:
About Rathbones Group Plc: Rathbones GroupPlc, through its subsidiaries, is one of the UK’s leading providers of investment management services for individuals, charities and professional advisers. This includes discretionary investment management, unit trusts, tax planning, trust and company management, financial advice and banking services. Rathbones manages £37.5bn of assets (as at 30 September, 2017). This includes £5bn run by Rathbone Unit Trust Management. Rathbones has over 1,100 staff in 16 locations across the UK and Jersey. Rathbone Investment Management Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No. 1448919. Rathbone Investment Management Limited is part of Rathbones Group Plc. Head office 8 Finsbury Circus London EC2M 7AZ. The information contained in this note is for use by investment advisers and journalists and must not be circulated to private clients or to the general public. Past performance should not be seen as an indication of future performance. The value of investments and the income from them may go down as well as up and you may not get back your original investment. Edward Smith is Head of Asset Allocation Research. The views reflected in the research paper and in the press release are his own and should not be taken as investment advice.
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