Getting to the Core: Inflation Risks Within and Across Asset Classes

Abstract

Do “real” assets protect against inflation? Core inflation betas of stocks are negative while energy betas are positive; currencies, commodities, and real estate also mostly hedge against energy inflation but not core. These hedging properties are reflected in the prices of inflation risks: only core inflation carries a negative risk premium, and its magnitude is consistent both within and across asset classes, uniquely among macroeconomic risk factors. The relative contribution of core and energy changes over time, helping explain the time-varying correlation between stock and bond returns. A two-sector New Keynesian model qualitatively accounts for these facts.