Mixed Record Of Inflation Hedges

October 06, 2014

There are plenty of inflation-protection tools, but not too many that truly deliver the goods.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by John Eckstein, chief investment officer and director of research at Astor Investment Management.

Many of our clients are concerned about a rise in inflation. So, I thought I’d take a hard look at various supposed inflation hedges.

We will find that the lowly Treasury bill, the least sexy asset on the planet, is in some ways the best addition as an inflation hedge. So here’s to the reliability of ETFs such as the SPDR Barclays 1-3 Month T-Bill ETF (BIL | A-62).

Plenty Of Options, Plenty Of Doubts

But there are plenty more that are worth looking at.

So those looking for a more dramatic addition to their portfolios than BIL, such as a commodity index, will also get some support, while gold bugs may be disappointed by the metal’s actual inflation-hedging ability. I’ll even take a brief side tour into Japan’s experience with deflation.

The chart below shows inflation as defined by the Consumer Price Index (CPI) from 1950 to date. The eye is drawn to the inflation of the 1970s, wrung out of the system by Federal Reserve Chairman Paul Volcker in the early 1980s.


Inflation has been more tame since, averaging about 2.4 percent per year over the past 20 years. While the Fed used to maintain what I thought was a constructive ambiguity about how it defined price stability, in 2012 it officially announced a 2 percent inflation target—giving investors an explicit anchor for expectations and a benchmark for the central bank.


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