Rising Inflation Risk and How to Address It

Key Insights

• Sustained inflation has historically been a headwind for stocks and bonds, reducing the diversification benefits of holding both in a multi‑asset portfolio.
• Although markets appear to assume the current inflation spike is temporary, durable increases in housing costs and wages may challenge that view.
• Inflation risk can be mitigated by inflation‑linked sovereign bonds; cyclical stocks that keep up with inflation; and high‑yielding, low‑duration bonds.

For more than a decade, inflation has not been regarded as a major investment risk. Indeed, since the global financial crisis, deflation has been seen by many as a bigger threat—policymakers in Japan and the eurozone have been struggling to push inflation up, not down. With inflationary pressures now building across the world, though, this could change.

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