8/7/2019 Inflation Outlook - Most Likely Contained but Possibly Accelerating

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CIO InsIghts

2011 American Century Proprietary Holdings, Inc. All rights reserved. Non-FDIC InsedMy Lose VleNo Bnk G

SECO ND Q uartEr 2011

g. David MacEwe

Chie Investment OcerFixed Income

Increased odds o higher

infation have signicant

ramications or uture asset

perormance and present

investment decisions.

We believe core U.S. infation has bottomed. Our analysis suggests an 80-90%probability that overall U.S. infation will be higher during the next three to ve yearsthan its been over the past ve. Contained overall infation o 1-4% is our most likelyprojected scenario, but monetary expansion and global wage and commodity-pricepressures could push CPI beyond that level. This outlook strongly supports maintaining apermanent allocation to infation-hedging strategies in investment portolios.

We also have a low-growth/low-infationdisinfation/defation scenariowithCPI below 1%refecting a return torecessionary conditions like we saw

in 2008. This is our lowest probabilityscenarioroughly 10-15%.

In between is our highest-probabilityscenario (approximately 50%): containedinfation o 1-4%. We see infation trendinghigher, signaled by increases in CPI, coreCPI, and the producer price index. However,we think infation will be constrained bystrong counteracting macroeconomicorces. Much o the developed worldparticularly the U.S. and Japanhaveimportant economic sectors stuck in thelingering grip o the Great Recession. In theU.S., this includes the labor market, housing,and manuacturing capacity.

Pracical Poiioi or Realiic

Expecaio

Our research suggests a constrained,moderate increase in infation going orward,but our disciplined process o constructingscenarios and assigning probabilitiesrefects the hard reality that we dont have acrystal ball with regard to infation outcomes.Instead, we position our portolios or a

range o possible outcomes with diversiedcore holdings, including infation-hedgingstrategies, and weigh our exposuresaccording to our predicted probabilities.Investors can ollow a similar but simplerapproach in their diversied portolios bymaintaining a 10-20% permanent allocationto infation-hedging strategies, includinginfation-linked bonds, commodities andcommodity-linked securities, non-dollarinvestments, and/or real estate-relatedsecurities.

For the past ve years (2006-10), overallU.S. infationas measured by theconsumer price index1 (CPI)and so-calledcore infation (CPI without its volatile ood

and energy components) have averaged2.2% and 2.0% per year, respectively, abouthal their 50-year averages o 4.1% and4.0%, respectively. Such an extended periodo below-average infation is unlikely tooccur again in this economic cycle.

Increased odds o higher infation havesignicant ramications or uture assetperormance and present investmentdecisions. The xed income and strategicasset allocation teams at American CenturyInvestments have studied the economic

environment, constructed possible infationscenarios, and assigned probabilities as aguideline or current and uture investmentchoices.

specrum o Ifaio sceario

At one end o our infation spectrum iselevated/rising infation, eaturing CPIabove 4%. This scenario is based primarilyon the ollowing actors: 1) expansionarycentral bank monetary policiesparticularlyby the Federal Reservethat boost themoney supply and build pools o bank

reserves waiting to be released; 2) risingglobal wage and commodity price infationparticularly in Chinathat could be importedhere through higher oreign product prices;and 3) devaluation o the U.S. dollar. We putthe probability o elevated/rising infationat about 35-40%. This probability alsoincludes a possible stagfation scenario inwhich real economic growth is 0% or lessand CPI is greater than 4%.

IN-FLY-71195 1103

The opinions expressed are those of G. David

MacEwen and are no guarantee of the futureperformance of any American Century Investmeportfolio. High-yield corporate bond funds inveslower-rated securities which are subject to greacredit risk, default risk and liquidity risk.

For educational use only. This information is notintended to serve as investment advice.

Diversifcation does not assure a proft or protect againsta loss in a declining market.

1 The consumer price index (CPI), published by the Department o Labor,

measures average changes in prices o goods and services.

Inflion OlookMos Likely Conined b

Possibly acceleing