Time to fear inflation?

Inflation has started to rise in many countries, as the global economy is recovering from the pandemic. This has triggered fears of a lasting rise in inflation, that would eventually force central banks to tighten policy in an abrupt manner. We think these fears to be overblown. While inflation will rise further in most countries this year, we expect the increase to be temporary. We also take in this report a closer look at several structural factors – globalization, e-commerce, aging of populations – that might have contributed to the disinflationary trend observed. We find in the end only a moderate contribution. Thus, a partial reversal of some of these factors is unlikely to exert a significant upward pressure on prices.   While our baseline scenario foresees a benign inflation dynamic in the medium-term, it is nevertheless crucial for investors to ponder the consequences of a more lasting overshooting. How vulnerable are interest rates to a regime shift in inflation after more than a decade of unconventional policies? Term and Inflation premia have obviously some room for decompression. That said, there are limits how lasting inflation could rise, as we believe that central banks would not stay put at the sideline. How to navigate an inflation regime shift? The roadmap is not straightforward: consistent inflation hedges are rare across history. Commodities? Most probably in the industrial metals space, but we do not believe in a global commodity super-cycle. Real Estate? We examine both the short and the long-term hedging-capacity of various sub-sectors. The switch of equity/bond correlation into positive territory is a major risk. Diversification and multi-factor strategies will help. We propose quantitative methodologies to build “inflation-proof” portfolios.