It’s been a long time since investors have had to worry about inflation. But a strong economic rebound from the pandemic could trigger higher inflation, requiring investors to think about portfolio adjustments and to reconsider some asset classes shunned over the last decade.

People tend to think about the next crisis in terms of past crises. But just like this pandemic-inspired recession isn’t the global financial crisis of 2008, this round of inflation won’t be like the 1970s. While we expect inflation to increase in the short run, we don’t believe it will be the major concern it was 50 years ago. Our expectation is for 2.1% inflation by the end of 2021, trending sideways thereafter.

Still, with global real GDP growth expected to exceed 5% in 2021 and massive fiscal stimulus programs underway, especially in the US, inflation expectations are increasing against an unusual set of market and economic conditions. However, because the recession was short-lived, we believe the supply constraints driving inflation should ease relatively quickly. And as the US economy begins to recover, core inflation should diminish as supply catches up to demand. While some popular measures suggest annualized inflation expectations over the next five years have reached 2.4%, this is still a moderate level, despite being the highest in a decade.

Gauging Inflation Sensitivity for Different Assets

Moderate inflation is both a blessing and a curse. On the one hand, it helps a company’s growth by increasing cash flow. Many companies, especially those that are commodity-related, can pass through higher costs via pricing power, potentially leading to higher margins.