Advanced economies, including the United States, have experienced a powerful disinflationary trend for the past several decades, driven by a confluence of reinforcing global trends. We believe that the four-decade trend of falling inflation in the US has ended, and inflation will likely rise at a higher rate over the next decade. We see upside risks to the current 10-year inflation forecast of 2.3% embedded in our capital market assumptions, however, an extreme scenario of 1970s-style, double-digit inflation appears unlikely.
Inflation affects asset prices in varied ways and can have a material impact on portfolio outcomes. Investors should build their strategic portfolios using forward-looking growth and inflation expectations rather than extrapolating forward the recent experience of low inflation. Our goal is to set reasonable expectations for inflation over the next decade, considering multiple factors, and to explore if “real assets” can enhance portfolio outcomes in a rising inflation environment.
We examine the performance of a wide range of publicly traded assets in inflationary environments. We find that real assets have much better inflation-hedging properties than nominal bonds and stocks. Additionally, real assets are diversifying to nominal assets. Our analysis shows a hypothetical portfolio that allocates to real assets would have outperformed a traditional balanced stock/bond portfolio meaningfully in inflationary periods. We suggest investors diversify their portfolios by allocating a portion to liquid real assets for more robust portfolio outcomes in the next decade.