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Which Asset Classes Hedge Against Inflation?

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Hedge Against Inflation

Hedge Against Inflation

This infographic is available as a poster.

Which Asset Classes Hedge Against Inflation?

U.S. inflation has climbed 5% over the last year, the largest 12-month increase since August 2008. With this in mind, many investors may be wondering how to position their portfolio to hedge against inflation.

In this Markets in a Minute chart from New York Life Investments, we show which asset classes have beat inflation in recent years.

Real Returns by Asset Class

To see which asset classes have helped hedge against short-term inflation, we calculated annual real returns—returns net of inflation—for various types of investments. A return above zero means that the asset class beat inflation, while a return below zero means that the asset class did not keep up with inflation.

Here are minimum, median, and maximum annual real returns for various asset classes from 2012-2020.

 MinimumMedianMaximum
Global equities-11.615.424.5
U.S. large cap equities-6.314.330.9
Listed infrastructure equities-8.812.323.8
Real estate investment trusts (REITs)-7.37.226.4
Gold-28.86.023.2
U.S. treasury inflation protected securities (TIPS)-10.12.69.6
Foreign bonds-9.61.814.1
Floating rate bonds-0.40.02.2
Global commodities-33.9-2.715.3
Energy equities-38.0-11.536.7

Global equities had the highest median real return in recent years, followed by U.S. large cap equities and listed infrastructure equities.

Gold beat inflation about half the time, though in its worst year (2013) it was almost 30% below inflation. At that time, the U.S. Federal Reserve announced it would end quantitative easing measures, which decreased the perceived need for gold as a hedge.

Global commodities and energy equities had the only negative median real returns of the group. However, energy equities also had the highest maximum return over the last decade, and proved to be the most volatile asset class of the group.

Hedging During High Inflation

Of course, there are some limitations to this data. U.S. annual inflation has been relatively low in recent years, averaging under the Federal Reserve’s 2% target.

Asset classes may respond differently during periods of high inflation. For example, equities have shown their highest real returns when inflation is between 2% to 3%. However, returns may become more volatile when inflation is high, because it can increase costs and reduce earnings.

On the flip side, some asset classes perform better during periods of high inflation. While commodities had a negative median real return in recent years, they performed well during three historical periods of high inflation.

Hedge Against Inflation

When annual inflation averaged about 4.6% from 1988-1991, commodities had a total annualized return of over 20%. Total annualized returns show what an investor would have earned over a given time period if returns were compounded. Gold has had a more mixed track record during high inflation, though it had a whopping annualized return of 35% from 1973-1979.

The ability for an asset class to hedge against inflation can also depend on the timeframe. For example, over the long-term, gold has seen strong inflation-adjusted returns.

Time to Take Action?

U.S. Federal Reserve chair Jerome Powell believes rising U.S. inflation is temporary. Prices decreased sharply at the onset of the pandemic, making year-over-year inflation figures look much larger. He also believes supply bottlenecks are temporary as industries have been caught with soaring demand amid a quick reopening. However, some Fed officials say the economy is in unprecedented territory, and it’s hard to know where inflation will go next.

What can investors do? There is no one asset class that has proven to be a silver bullet against inflation historically. Instead, investors may consider diversifying their portfolio with asset classes such as equities, REITs, commodities, and gold. This may help hedge against inflation, whether it stabilizes around 2% or rises to levels not seen for decades.

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Markets in a Minute

Visualizing Historical Oil Prices (1968-2022)

The real price of oil reached a seven year high amid the Russia-Ukraine war. How have other major events impacted historical oil prices?

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Historical Oil Prices (1968-2022)

Amid Russia’s invasion of Ukraine, the inflation-adjusted price of oil reached a seven-year high. Russia is one of the world’s largest producers of crude oil, and many countries have announced a ban on Russian oil imports amid the war. This has led to supply uncertainties and, therefore, rising prices.

How does the price increase compare to previous political and economic events? In this Markets in a Minute from New York Life Investments, we look at historical oil prices since 1968.

The Fundamentals Behind Oil Prices

Before diving into the data, it’s worth explaining why historical oil prices have seen so much volatility. This mainly stems from the fact that the supply and demand of oil tends to have a low responsiveness to price changes in the short term.

  • On the supply side, oil production capacity can be challenging to change quickly. Drilling a new oil well is a lengthy and complex process.
    • On the demand side, it can be quite difficult to change equipment that uses petroleum products. For instance, in the short term, people will keep driving their cars to work despite higher gas prices.

    For these reasons, in order to re-balance supply and demand, it takes a sufficiently large price change to occur. For example, if gas prices were to double, only then may enough commuters consider taking public transit or changing behavior in other ways.

    What kind of events can shock the system enough to drive big price changes?

    A large portion of the world’s oil is located in regions that are prone to political conflict. Political events can disrupt the actual or perceived supply of oil, and drive prices upwards. On the other hand, an economic downturn reduces energy demand and can depress prices.

    Looking Back at Historical Oil Prices

    To compare how events have influenced historical oil prices, we used data from the U.S. Energy Information Administration. It should be noted that the data extends to March 31, 2022, and does not reflect the recent price dips in response to Shanghai lockdowns and U.S. rate hikes.

    Here is the inflation-adjusted price of a barrel of crude oil during select events.

    DateEventCrude Oil Price per Barrel
    Real 2010 Dollars
    Q1 1971U.S. spare capacity exhausted$13.47
    Q1 1973Arab Oil Embargo$15.90
    Q1 1974Embargo lifted$42.00
    Q1 1978Iranian Revolution$39.65
    Q3 1980Official start of Iran-Iraq war$76.93
    Q1 1986Saudis abandon swing producer role$32.90
    Q2 1990Trough price prior to Iraq's invasion of Kuwait$26.72
    Q3 1990Iraq invades Kuwait$39.37
    Q4 1990Peak price during invasion$47.15
    Q2 1991Iraq accepts UN resolution to end conflict$30.18
    Q4 1996Peak price prior to Asian financial crisis$31.88
    Q3 1997Asian financial crisis begins$25.35
    Q1 1999OPEC cuts production target by 1.7M b/d$16.41
    Q4 2000Peak price prior to 9/11$38.73
    Q3 20019/11 attacks$31.76
    Q4 2001Trough price after 9/11$24.22
    Q1 2005Low spare capacity$54.71
    Q2 2008Peak price before global financial collapse$125.21
    Q1 2009OPEC cuts production targets by 4.2M b/d$42.89
    Q2 2014Peak price prior to supply gut price collapse$95.07
    Q1 2015OPEC production quota unchanged despite low prices$44.41
    Q4 2019Price immediately prior to global pandemic$50.38
    Q1 2020COVID-19 declared a pandemic$40.34
    Q2 2020Trough price during global pandemic$24.65
    Q1 2022Russia invades Ukraine$77.94

    From the first quarter of 1968 until the second quarter of 1986, data reflects the reporter refiner acquisition cost. From the third quarter of 1986 to the first quarter of 2022, data reflects the West Texas Intermediate cost.

    In 1973, the Organization of the Petroleum Exporting Countries (OPEC) announced an embargo (ban) on oil exports to the United States. The move was in response to the U.S. providing military aid to Israel. By the time the embargo ended in March 1974, the inflation-adjusted price of crude oil had risen 164%. The embargo also led to a selloff in the stock market, with the recovery taking almost six years.

    Historical oil prices rose rapidly from 2004-2008. During that time, economic growth was fueling oil demand but there was little spare production capacity. By the second quarter of 2008, inflation-adjusted oil prices hit a high of $125 per barrel. They crashed by 66% shortly thereafter due to the global financial crisis.

    Most recently, the COVID-19 pandemic and associated containment measures caused historical oil prices to drop by nearly 40% in three months. Oil prices have since risen 216% from their pandemic low, as of the first quarter of 2022. This is due to the economic recovery and Russia’s invasion of Ukraine.

    Oil as an Investment

    Investors’ interest in oil as an alternative investment has risen in recent years. Given the high volatility in historical oil prices, investors may want to consider their comfort with this level of risk. Of course, an investor’s sustainability goals may also be a factor when choosing whether to invest in oil.

    However, oil also presents opportunities. It has had low-to-negative correlation with U.S. bonds in recent years and may help investors diversify their portfolios. Not only that, it may help investors manage rising interest rates. An economic recovery typically leads to rising interest rates, but also more energy demand. Oil prices have historically climbed during these periods.

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Markets in a Minute

Mapped: Interest Rates by Country in 2022

For the vast majority of countries, interest rates are marching upward. Here’s how they break down in 2022.

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Interest Rates

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Mapped: Interest Rates by Country

Soaring inflation, the war in Ukraine, and strengthening economies are spurring interest rate increases around the world. At the same time, central banks are unwinding record monetary stimulus from COVID-19.

In this Markets in a Minute from New York Life Investments, we show interest rates by country in 2022. Interest rates are based on short-term benchmark policy rates set out by central banks.

Interest Rates Around the World in 2022

While the vast majority of countries saw a decline in interest rates over recent years, this trend is reversing for many in 2022.

After hovering at 0.0%, the U.S. increased its short-term interest rate to 0.5%. Experts project up to seven interest rate hikes this year, with interest rates rising as high as 1.9% by year-end.

For many countries in Europe, interest rates climbed out of negative territory for the first time since 2014. Interest rates now sit at 0.0% across the European Union.

Country/ Region
Short-Term Interest Rate (%)
🇦🇱 Albania1.0
🇦🇲 Armenia9.3
🇦🇺 Australia 0.1
🇦🇹 Austria0.0
🇦🇿 Azerbaijan7.8
🇧🇸 Bahamas4.0
🇧🇩 Bangladesh4.8
🇧🇧 Barbados2.0
🇧🇾 Belarus12.0
🇧🇪 Belgium0.0
🇧🇿 Belize2.3
🇧🇴 Bolivia 3.9
🇧🇼 Botswana3.8
🇧🇷 Brazil11.8
🇨🇦 Canada0.5
🇹🇩 Chad3.5
🇨🇱 Chile7.0
🇨🇳 China3.7
🇨🇴 Colombia5.0
🇨🇬 Congo7.5
🇨🇷 Costa Rica2.5
🇨🇺 Cuba2.3
🇨🇿 Czech Republic5.0
🇩🇰 Denmark-0.6
🇩🇴 Dominican Republic5.5
🇪🇨 Ecuador7.2
🇪🇬 Egypt9.3
🇫🇯 Fiji0.3
🇫🇮 Finland0.0
🇫🇷 France0.0
🇬🇪 Georgia11.0
🇩🇪 Germany0.0
🇬🇷 Greece0.0
🇬🇾 Guyana5.0
🇭🇰 Hong Kong0.8
🇭🇺 Hungary4.4
🇮🇸 Iceland2.8
🇮🇳 India4.0
🇮🇩 Indonesia3.5
🇮🇪 Ireland0.0
🇮🇱 Israel0.1
🇮🇹 Italy0.0
🇯🇲 Jamaica4.5
🇯🇵 Japan-0.1
🇯🇴 Jordan2.8
🇰🇿 Kazakhstan13.5
🇰🇪 Kenya7.0
🇰🇬 Kyrgyzstan10.0
🇱🇦 Laos3.0
🇱🇻 Latvia0.0
🇱🇧 Lebanon7.8
🇱🇸 Lesotho4.0
🇱🇾 Libya3.0
🇱🇹 Lithuania0.0
🇱🇺 Luxembourg0.0
🇲🇾 Malaysia1.8
🇲🇻 Maldives7.0
🇲🇱 Mali4.0
🇲🇽 Mexico6.5
🇲🇳 Mongolia9.0
🇲🇦 Morocco1.5
🇳🇵 Nepal7.0
🇳🇱 Netherlands0.0
🇳🇿 New Zealand1.0
🇳🇬 Nigeria11.5
🇳🇴 Norway0.8
🇵🇰 Pakistan12.3
🇵🇾 Paraguay6.3
🇵🇪 Peru4.5
🇵🇭 Philippines2.0
🇵🇱 Poland4.5
🇵🇹 Portugal0.0
🇶🇦 Qatar2.5
🇷🇴 Romania3.0
🇷🇼 Rwanda5.0
🇸🇦 Saudi Arabia1.3
🇷🇸 Serbia1.5
🇸🇱 Sierra Leone14.3
🇸🇬 Singapore0.3
🇸🇰 Slovakia0.0
🇿🇦 South Africa4.3
🇰🇷 South Korea1.3
🇸🇸 South Sudan12.0
🇪🇸 Spain0.0
🇱🇰 Sri Lanka13.5
🇸🇿 Swaziland4.0
🇸🇪 Sweden0.0
🇨🇭 Switzerland-0.8
🇹🇼 Taiwan1.4
🇹🇭 Thailand0.5
🇹🇳 Tunisia6.3
🇹🇷 Turkey14.0
🇺🇬 Uganda6.5
🇺🇦 Ukraine10.0
🇦🇪 United Arab Emirates1.8
🇬🇧 United Kingdom0.8
🇺🇸 United States0.5
🇻🇳 Vietnam4.0
🇿🇲 Zambia9.0

*Australia, China, India, Pakistan, Peru, Poland, Serbia, Romania data as of April 2022.
Reflects data for March or February 2022 depending on latest available data.
Source: Trading Economics (Apr 2022)

In Latin America, several central banks are taking a hawkish stance as oil price shocks are causing inflation to accelerate.

Mexico raised its benchmark interest rate to 6.5% in March in response to inflation hitting 20-year highs. Even before the war in Ukraine, global factors such as rising oil and import prices were already having a greater impact on Latin American countries than advanced economies.

Unlike the U.S. and most countries located in Europe and Latin America, China is anticipated to potentially lower its interest rates.

A renewed COVID-19 wave has slowed growth, with the government requiring countless factories to close in order to combat the spread of the Omicron variant. Disruptions have cascaded across supply chains—from electric vehicles to iPhones— leaving goods in shorter supply. China is responsible for roughly one-third of global manufacturing.

High-Water Mark

Which countries have the highest interest rates in 2022?

Interest Rates

At an eye-watering 80%, Zimbabwe has the highest interest rate of any country.

In early April, the central bank raised rates by 20 percentage points to combat a 73% inflation rate. Small businesses, teachers, and analysts have been urging the government to adopt the U.S. dollar to boost economic and investor confidence amid currency woes.

With an interest rate of 44.5%, Argentina has the second-highest rate. To get closer to reaching the requirements for rescheduling its $40 billion loan to the International Monetary Fund (IMF), the central bank raised interest rates for the second time this year. The IMF requires having interest rates above the rate of inflation. As of February, Argentina’s inflation exceeded 50%.

Meanwhile, oil-rich countries such as Angola (20%), Iran (18%), and Russia (17%) all made it into the top 10 for highest rates globally.

Treading Water

What is the outlook for interest rates in 2022 and beyond?

In the short term, experts believe interest rates will likely rise to fight inflation. They could also play a role in slower economic growth, especially if raised too quickly. Recently, the World Bank revised global growth to 3.2% due to the war in Ukraine and rising food and energy prices—about a percentage point lower than its previous forecast of 4.1%.

The longer-term view may look different.

Structural factors, such as an aging population, will likely lead to an increase in savings rates for retirement. In theory, higher savings rates increases the total supply of funds, depressing the interest rate. By 2100, people over 50 are projected to rise from 25% to 40% of the global population.

The end of ultra-low interest rates may be over for now, but broader factors, including growing global debt—which stands at 355% of the world’s GDP—suggests it may be a short to medium-term adjustment.

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