The Best Strategies for Inflationary Times
32 Pages Posted: 29 Mar 2021 Last revised: 25 May 2021
Date Written: May 25, 2021
Over the past three decades, a sustained surge in inflation has been absent in developed markets. As a result, investors face the challenge of having limited experience and no recent data to guide the repositioning of their portfolios in the face of heighted inflation risk. We provide some insight by analyzing both passive and active strategies across a variety of asset classes for the U.S., U.K., and Japan over the past 95 years. Unexpected inflation is bad news for traditional assets, such as bonds and equities, with local inflation having the greatest effect. Commodities have positive returns during inflation surges but there is considerable variation within the commodity complex. Among the dynamic strategies, we find that trend-following provides the most reliable protection during important inflation shocks. Active equity factor strategies also provide some degree of hedging ability. We also provide analysis of alternative asset classes such as fine art and discuss the economic rationale for including cryptocurrencies as part of a strategy to protect against inflation.
Keywords: Inflation hedge, inflation surprises, inflation shocks, temporary inflation, permanent inflation, inflation betas, portfolio management, asset allocation, risk management, commodities, gold, factor investing, bitcoin, cryptocurrency
JEL Classification: G11, G13, G15, G01, E31, E44
Suggested Citation: Suggested Citation