Hedging against inflation risk: Everything depends on the behaviour of central banks

Because of recent inflation trends and the risk of inflation in the future, many investors are thinking about seeking protection against inflation. Quite often, it is assumed that real assets (equities, which represent corporate capital, real estate, infrastructure, etc.) provide a hedge against inflation. But we need to be more rigorous: Income paid by real assets (dividends, rents) normally follows inflation, but in practice this is not so clear; But the value of assets falls if central banks react to inflation by sharply raising interest rates: there are then capital losses and no protection against inflation at all. For real assets to be a protection against inflation, central banks must therefore react little to inflation and, more specifically, let real interest rates fall when inflation rises by at least as much as the decline in real growth.