Originally published April 2021.
Inflation is in the news again. Many prices are rising even before we can physically get out and spend, and governments are pouring vast amounts into the economy.
Whichever side of the inflation debate you are on, it makes sense to assess the impact inflation could have on portfolios. Most of today’s investors have never seen meaningful inflation in the whole of their professional careers. So, as we emerge from lockdowns and pent-up demand meets ongoing supply constraints, we consider how different asset classes might fare if inflation does return.
Bonds – higher inflation will be the death knell for the bull market in conventional bonds. Between 1946 and 1981, 30-year US Treasuries lost over 80% of their value and British Consols lost 97% of their purchasing power (according to Reuters). Government bonds became known as ‘certificates of confiscation’. Before we even consider equities, this spells the end of the 60:40 portfolio.
Take some index-linked bonds, mix with value/commodity equities, add a decent slug of gold and, if liked, at most a pinch of infrastructure
Cash – inflation is the erosion of the purchasing power of money. If interest rates are kept below the level of inflation, as the US Federal Reserve has promised, huge amounts of cash and money market funds could be in search of a new, inflation-proof home.
