Why Investors Need Inflation Protection Now

Investors have been selling inflation protection in the mistaken belief that it’s no longer needed. They’ve helped create a unique opportunity.

As inflation recedes from recent cyclical highs, many investors are selling their holdings of inflation-protected securities. The result? Explicit inflation protection has become unusually cheap. Investors needing to boost their strategic allocations to inflation strategies may wish to take advantage of this opportunity—securing inexpensive “flood” insurance ahead of higher structural inflation over the coming decade.

Entering a Regime of Higher—and Spikier—Inflation

For the past 40 years, global deflationary forces have prevailed, facilitating a regime of low equilibrium inflation. But mounting pressures from macro megaforces point toward higher structural inflation and increased vulnerability to inflation shocks in the years ahead. At the core of our expectations are three powerful forces: deglobalization, aging demographics and climate change.

  • Deglobalization leads to higher inflation by constraining the global pool of labor and increasing labor’s bargaining power, among other factors.
  • Meanwhile, the global labor pool is shrinking, thanks to aging demographics. Without a sustained increase in productivity to offset it, a shrinking workforce empowers labor—yet another inflationary factor.
  • The inflationary effects of deglobalization and demographics could be compounded by climate change. For instance, the energy transition—while probably deflationary in the long term—could drive costs higher in the next decade.