
The New Inflation Regime
What to expect
We had already seen supply constraints driving high inflation over the past year, fundamentally changing how we should think about the macro environment and market implications. The outbreak of a horrific war in Ukraine spurred an energy security crisis, which we expect to drag down growth, increase inflation and stoke demand for non-Russian fossil fuels to alleviate consumer pain. Meanwhile, U.S. inflation data shows price increases hovering near 40-year highs while jobs data showed a robust labor market. We see the Fed normalizing policy and delivering on its projected rate path this year but then pausing to evaluate the effects on growth. We believe the eventual sum total of rates in this cycle will be historically low, given the level of inflation.
Persistent inflation

Forward-looking estimates may not come to pass. Sources: BlackRock Investment Institute, U.S. Bureau of Economic Analysis and Eurostat, with data from Haver Analytics, December 2021. Note: The chart lines shows U.S. core personal consumption expenditure (PCE) inflation and euro area headline inflation. The yellow triangle shows our expectation of U.S. PCE –the Fed’s preferred gauge of inflation -in five years’ time. We derive this from our estimate of the consumer price index in five years’ time, which currently stands at 3%. We assume a 0.3 percentage point wedge between PCE and CPI inflation based on the historical relationship and estimates of the factors that influence both. The orange triangle shows our estimate of euro area HICP (Harmonized Index of Consumer Prices) inflation in five years’ time.
U.S. and Euro area inflation and our expectations, 2006-2026
We see inflation settling just under 3% in the U.S. and 2% in Europe in 2026. We see 2022 marking the second consecutive year of stock gains and bond losses. This is the first time this has happened for two consecutive years since 1977. In our base case scenario, we estimate that U.S. inflation would increase by around 1 percentage point and growth would be 0.5 percentage points lower – though with much uncertainty on those estimates.
Supply chain constraints

BlackRock Investment Institute, and Institute for Supply Management, with data from Haver Analytics, December 2021. Note: Index of manufacturing supply chain constraints is based on ISM survey indicators: supplier delivery times, backlog of orders, prices paid and inventories.
Supply chain disruptions are at historical highs
The surge in inflation over the past year has been driven by economy-wide and sector-specific supply constraints, a profound change from the decades-long dominance of demand drivers. The pandemic resulted in a huge switch in consumer spending in the U.S., away from services and towards goods. This pushed up goods prices, resulting in higher overall inflation, despite activity not being back to its pre-Covid path. We were in a world shaped by supply and expected the supply side to adjust over time – but the nature of the activity restart meant we were far from 1970s stagflation. We are now seeing a textbook energy supply shock, more like the 1970s, layered on top of the restart.
Central bank frameworks

Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, Federal Reserve Board, U.S. Bureau of Labor Statistics, Bloomberg, with data from Haver Analytics, December 2021. Notes: The chart shows the U.S. nominal Federal Funds Rate (orange line), year on year headline Core Price Inflation (CPI) inflation (green) and some projected paths of the nominal federal funds rate. The U.S. CPI shown from 2022-2025 are our estimates embedded in our Capital Market Assumptions. The dotted red line shows our own projection. The gray line shows the path that would have been implied by a simple monetary policy rule linking the choice of policy rate to the rate of inflation and the level of the output gap. The pink line shows the current market-implied path.
U.S. CPI inflation, Fed Funds Rate and expectations, 2000-2025
Major central banks’ much more muted policy reaction shows that they will likely live with supply-driven inflation rather than destroy demand and economic activity – provided inflation expectations remain anchored. We see a steeper yield curve than the market currently expects as inflation rises due to accommodative central bank policy, continued fiscal spending in developed economies, and a revival of the term premia.
Portfolio Positioning
We are now in a fundamentally different market regime from the one we’ve seen over the past decade – one driven by higher supply-driven inflation and a more muted cumulative central bank response to such inflation. This macro backdrop reinforces a significant asset reallocation in favor of equities and away from fixed income.
Asset classes in different inflationary regimes

Source: Bloomberg; Data as of May 2021. Inflation periods defined by QoQ Seasonally-adjusted CPI changes of more or less than 17bps, or 40%, from the median QoQ CPI change of 43bps. Inflationary periods measured between July 2001 and May 2021 Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Commodities, infrastructure, and real estate have generally outperformed traditional equity and fixed income indices in periods on high inflation.
The inflationary environment favors stocks and many DM companies have been able to pass on rising costs and keep margins high. We remain underweight bonds as we see long-term yields climbing further.
Investors must be deliberate about finding opportunities across and within different asset classes to build portfolio resilience.
Ways to address inflation within your portfolio
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Inflation-linked bonds and unconstrained strategies may outperform traditional government bonds. Traditional fixed income assets are expected to generate a negative real yield over the medium term. Consider unconstrained strategies for greater flexibility in capturing opportunities across different sectors to achieve a positive real yield.
With nominal government bond yields less sensitive than in the past to higher inflation expectations and actual inflation, inflation-linked bonds can provide resilience and help protect against further inflation surprises.
Learn more about BlackRock’s fixed income offerings.
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Value stocks from companies with strong pricing power can combat rising costs and beat earnings expectations. We see pricing power and asset-light operations as key components of stock price success during inflationary periods. Value stocks have historically fared well in an environment characterized by higher inflation, a steeper yield curve and consumer-powered economic reopening.
Additionally, profitable blue-chips with stable earnings and low debt can serve as a natural ballast to value stocks because of their ability to absorb higher input costs while utilizing their pricing power to increase market share.
Learn more about BlackRock’s equities platform.
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Core real estate and real estate debt may decrease risk and achieve higher returns. Real Estate lease structures enable rent adjustments with rising inflation and may allow for pass-through expenses. Rent growth leads to more income in Core Real Estate, while it reduces risk for a Real Estate Debt fund.
Core Real Estate values rise with inflation due to higher replacement costs increasing the value of existing assets, as it becomes more expensive to build new supply. Holders of Real Estate Debt benefit as paying down debt with inflated dollars is beneficial for levered real estate.
Learn more about BlackRock’s real estate solutions.
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Infrastructure investments can serve as a diversified source of return. Many infrastructure assets have an explicit link to inflation through regulations, concession agreements or contracts. Moreover, infrastructure operating and maintenance costs are typically fixed - an implicit hedge against inflation on the cost side.
Assets with front-loaded dividend payments outperform amid rising inflation, having less downside risk in such an environment. As with real estate, the cost of new infrastructure construction increases with higher inflation, reducing competition to existing assets.
Learn more about BlackRock’s infrastructure offerings.
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Commodity futures and commodity-related equities enhance portfolio resiliency and strengthen commodities exposure. Commodities historically outperform during periods of high inflation. As demand for goods and services increases, so does the price of the commodities used to produce them. Commodity futures provide exposure to commodities, building portfolio resilience.
Commodity-related equities can be a strong complement to commodity futures. They provide access to both the entire value chain and to commodities not available via the futures market (e.g. platinum, diamonds, lithium, and iron ore).
Explore BlackRock’s latest insights into commodities markets.
The inflation challenge
Key points
Inflation stabilizes higher
Inflation will likely settle above the Fed’s 2% target due to evolving supply shocks, the Ukraine war, deglobalization and COVID lockdowns in China. It is likely that the Fed will not raise rates beyond neutral - a level that neither stimulates nor decreases economic activity.
A new frontier for yield
The current environment is creating opportunities for fixed income investors, especially in short-term and high-quality assets. Investors have been overweight cash allocations, which has helped preserve capital for future buying opportunities at better prices.
Diversification is key
Diversified portfolios with exposures to commodities, real assets and equity companies with high purchasing power are better positioned for periods of elevated and stickier inflation.
I don’t think we’re going into a recession, but I think it's becoming more prominent in the thought process of a lot of people out there. So, what do you do with that?
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