Do CPI+ Objectives Still Hold Up in Today’s Inflationary World?

In recent years, there has been much speculation as to whether the consumer price index (CPI)+ objectives remain relevant and attainable in the face of escalating inflation rates. Despite these challenges, there are two compelling reasons why it is crucial to maintain faith in CPI+ objectives.

Firstly, it is imperative to evaluate the CPI+ objectives over a specified time horizon for each risk mandate. Market expectations indicate a return to the central bank’s target of approximately 2% for UK CPI. If these expectations materialize, a sterling-based growth portfolio’s average CPI+ actual return over the next seven years would exceed the presumed return at 2% CPI. This underscores the significance of the CPI+ metric in gauging expected returns for various risk mandates.

Secondly, there has been a significant shift in the expected returns from fixed income investments, which creates a more favourable environment for diversified portfolios to achieve their targets. Gilt and US Treasury yields are currently the highest they have been since before the financial crisis, and the expected return from bonds is the best it has been for at least 15 years. This higher return significantly contributes to the foundation of a diversified portfolio, potentially allowing for an upward adjustment of CPI+ targets.

In view of these factors, we are advocating a tactical overweight allocation to fixed income relative to our strategic benchmarks, believing that fixed income returns are poised for a healthier outlook. As inflation expectations moderate, the CPI+ framework remains relevant and robust, offering investors a valuable tool to navigate the complex investment landscape.

It is important to recognize that the future holds promise for these objectives to once again serve as reliable guides for expected returns across various risk mandates.

William Dinning is the Chief Investment Officer at Waverton.

Charity Finance wishes to thank Waverton for its support with this article. The Charity Finance Yearbook is the ultimate reference source for charity finance professionals. Produced by the Charity Finance editorial and research team, it includes updates, advice and trends on accounting and audit, VAT and taxation, investment strategy, responsible investment and finance, risk, funding, performance and governance, law and regulation, HR and pensions, IT and property.