What 30 Years of Real Asset Behaviour Tells Us About Inflation Hedging

One of the essential debates is whether inflation will be sustained or just transitory. Consumer price inflation is surging globally and an intense debate is raging as to whether this is merely a transient phenomenon reflecting abnormally low base effects or something of a more lasting nature. The Federal Reserve (Fed) and other central bank policymakers have little doubt that costs for many goods and services will jump, but they do not expect this to be a long-term persistent trend. Rather they attribute this as a one-off as the economy recovers from the pandemic and not the start of a more persistent inflation problem. We are broadly in agreement and expect the rise in inflation to be temporary, but there are a number of risks investors should consider. Despite being transitory, it could be more prolonged than many investors anticipate.

We see upside risks to inflation in the short-term, but to us inflation is a process, not an event. Although we see incipient shifts that could push us into a higher inflation regime over time, it is not yet clear if something systemic is changing the inflation process itself. Understanding how assets perform across different inflation regimes can help investors to build in the appropriate hedge.