How can you best hedge your investment portfolio against the possibility of much higher inflation? It’s an important question to ask because inflation expectations are heating up and the trend may continue,
Earlier this month, St. Louis Federal Reserve President James Bullard told reporters that “the quiescence of inflation that has characterized the last decade may not be a good guide for what’s going to happen in 2021, where I would expect more volatile pricing, possibly higher inflation than we’re used to.”
Consider the 10-year breakeven inflation rate, which is what the bond market currently is betting inflation will average over the next decade. It recently rose above 2.0%, for the first time in more than two years. As recently as March 2020, the bond market was betting that inflation over the subsequent 10 years would average just 0.50%.
In the discussion below I review how various asset classes have performed historically on an inflation-adjusted basis.
I start by focusing on gold,…