Alternatives   |   Oct 20, 2021

The Role of Private Alternatives in Hedging Inflation

A Closer Look at Infrastructure, Real Estate, and Agriculture.

Investors have given little thought to inflation until recently as it has remained largely in check even though the 2008 financial crisis and the COVID-19 pandemic prompted some central banks to engage in quantitative easing — buying longer-term securities to increase the supply of money and lower interest rates. The central banks’ approach has kept borrowing costs low and helped keep economies afloat through the pandemic. However, the prevalence of this “cheap” money now may contribute to rising commodity prices and bubbles appearing in certain asset classes.

While investors have seen no meaningful inflation in the past two decades, is the time for complacency over? The US Consumer Price Index (CPI) rose 0.5% in July 2021 and was up 5.4% compared to the prior year, on pace with the rise in June and above the 5% gain in May. May’s increase was the largest spike in consumer prices since August 2008, more than a decade earlier. Data for August showed some moderation, with the price index rising 0.3% for the month and 5.3% for the year.

As signs of inflation emerged in economies around the globe, news outlets echoed a common refrain:

  • Producer prices climb 6.6% in May on annual basis, largest 12-month increase on record¹
  • European investors are concerned that inflation might begin to hit their portfolios as Western economies lift COVID-19 related restrictions²
  • Bank of Canada pares back bond buying, raises inflation forecast³
  • Eurozone inflation hits decade high as bottlenecks bite⁴
  • South Korea inflation at 9-year peak fuels rate hike expectations5
  • Food price inflation heaps pressure on poorer countries⁶

In testimony to Congress in mid-July, US Federal Reserve Chairman Jerome Powell acknowledged that inflation “has increased notably,” but he characterized the increase as temporary, resulting from pent-up consumer demand and pandemic-related supply-chain disruptions. However, the Fed’s continued quantitative easing spurred criticism from some US lawmakers and others who feared that it was fanning inflation.

Indeed, the Fed’s own consumer survey found median inflation expectations rose in August to an expected 5.2% in the short-term (one-year horizon) and 4.0% in the mid-term (three-year horizon), a record high for the survey launched in 2013.

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1 CNBC, June 15, 2021 Jeff Cox. 2 Pensions&Investments, May 31, 2021. 3 The Globe and Mail, July 14, 2021, Mark Rendell. 4 Wall Street Journal, August 31, 2021, Paul Hannon. 5 Reuters, September 1, 2021, Joori Roh. 6 The Financial Times, September 13, 2021, Jonathan Wheatley