The inflation conundrum

The prospect of a sharp pick-up in inflationary pressures is beginning to concern investors. Our historical analysis sheds light on how stocks, bonds and other asset classes behave during periods when inflation takes hold.

Inflation fears are rumbling through financial markets again. Unprecedented fiscal and monetary stimulus to contain the fallout from the Covid pandemic has investors worried that the multi-decade fall in inflationary pressures might finally be about to turn. The key question facing them is how to prepare.

In part, history suggests the outlook for markets depends on what the inflationary backdrop is likely to be. A combination of rising prices and modest economic growth, for example, favours commodities and gold. Inflation with an economy ‘running hot’, meanwhile, acts as a boost not only for those defensive investments, but also for real assets more generally – including housing, equities and high yield bonds.

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