Investing Under Inflation Risk

Abstract

Inflation, a quiet but growing concern, is complicated by its predictable timing and severity. A survey of 110 years of inflation data suggests that Treasury bills track inflation better than do equities or bonds, a robust result across 19 countries. In the period from 1980 to June 2012, evidence exists for including alternatives to Treasury bills, such as Fama-French’s HML and SMB as well as some stealth fighters. In the same period, evidence suggests that TIPS and trend-following strategies appear to help track inflation in the absence of Treasury bills. Gold and real estate, though popular, are unlikely to be good inflation hedges. Results suggest that an observer can track inflation, but should use methodologies that include dynamic weighting schemes because the relationship between inflation, assets, and investment strategies is very complex.

TOPICS: Financial crises and financial market history, in markets, exchanges/markets/clearinghouses