Swedroe: Infrastructure As Inflation Hedge—Not

June 24, 2013

A close look at infrastructure investment as inflation fighter suggests TIPS may be better.


After two decades of modest inflation, the easy monetary policies of central banks and the increased indebtedness of governments has led to heightened inflation concerns among investors. The heightened concerns have in turn led to a search for investment vehicles that can effectively hedge inflation risk.

The most effective hedges against inflation are Treasury inflation-protected securities (TIPS). Investors have also looked to commodities and real estate, and even equities in general, as other alternatives. Because of their nature as real assets, attention has turned to infrastructure investments as a potential hedge.

There are a few explanations behind the idea that infrastructure investments hedge inflation:

  • In an inflationary environment, the replacement costs of real assets increase, hence protecting the value of past investments.
  • Infrastructure firms have pricing power derived from their monopolistic market positions and the essential nature of their services. That allows firms to link revenues to inflation. In addition, some regulatory regimes give infrastructure a natural inflationary hedge, as prices are adjusted by inflation-linked formulas.
  • Infrastructure firms typically have a low share of operating costs after initial construction. Thus, they are generally little affected by inflation in input prices.


These are the arguments put forth for infrastructure as an inflation hedge and perhaps explain the $2.5 billion commitment by the California Public Employees Retirement System in its inflation-linked asset-class allocation.

To test the hypothesis that infrastructure is an inflation hedge, the authors of the paper, “Infrastructure as Hedge against Inflation — Fact or Fantasy?” used a proprietary data set of more than 1,400 listed infrastructure firms and matched this with a comprehensive set of inflation data across 45 countries and 30 years. The following is a summary of their findings:

  • In contrast to widespread belief, infrastructure overall—as well as its subsectors telecommunication, transport and utilities—didn’t hedge inflation better than domestic equities, which is to say, not very well.
  • Infrastructure didn’t provide a good inflation hedge for one-year, five-year or even longer horizons. However, after dividing the infrastructure sample into a group with high pricing power and one with low pricing power, the group with high pricing power did hedge inflation well, but this only seemed to hold true in stable inflation environments.
  • Foreign infrastructure didn’t hedge domestic inflation well.



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