Inflationary Regimes and Asset Class Performance

Inflation has stayed mostly in check over the past three decades, and often ran below most developed markets’ central bank mandates. The Covid-19 crisis and the policy direction that the Federal Reserve and US government have since taken, has, again, led to a lively debate about the likely path of inflation. Many think this debate is a non-starter.


However, some – and select market data suggest the same – believe the Fed has ‘out-doved’ itself, suggesting inflation may not remain ‘transitory’. Any growing risk of uncontrolled inflation, which might push the Fed’s hand in changing tack on its monetary policy path sooner than signalled, will, most likely, rattle markets and test the US government’s determination to continue stimulating. Investors are, as a result, keeping a close eye on inflation.

In the first of a series of notes we propose a systematic technique of identifying inflationary regimes and measure the performance of key asset class benchmarks and alternatives in those regimes. We show that systematic macro and trend following strategies perform well during inflationary regimes, outperforming both during periods of higher levels of inflation, and, especially during periods featuring a higher rate of change in the level of inflation. Throughout, we opine on what inflation could mean for asset allocation, how markets typically react to inflationary news, how well they forecast future inflation, and discuss some of the implications for a rising inflation regime. We focus on the US case.