Navigating the return of inflation risk
For now, the mere re-emergence of inflation risk is the more pressing consideration for investors, not what inflation will be one or two years down the road.The expansion following the financial crisis was a Goldilocks environment for markets, with growth and inflation neither running too hot nor cold. Early on in this cycle, the outlook for those key macro variables is both higher and more uncertain.
For the first time in at least a decade, the balance of risks for inflation is tilted more to the upside than downside. In our view, appropriate risk management entails that investors need to act and adjust portfolios to account for a potential fundamental change in the landscape – even if they believe those price pressures ultimately prove to be temporary. The key point is that markets will need to trade this shift in the risk distribution now, regardless of what inflation ends up being in a year or two ...