Sizing up inflation

Inflation expectations are rising, but is it a structural or transitory trend? To navigate this new twist in the post-pandemic recovery, explore BlackRock's latest insights on the factors driving inflation and recommendations on how to position portfolios in higher inflationary regimes.

Four reasons inflation is rising

BlackRock expects to see volatile inflation data over the near-term, with a more muted policy response than in the past. Examining the transitory and structural factors driving inflationary trends is key.

1. Central bank reaction

With its new flexible average inflation targeting strategy, the U.S Federal Reserve (“Fed”) intends to let inflation overshoot its 2% target.

Central bank reaction to inflation

Source: BlackRock Investment Institute, with data from the U.S. Bureau of Economic Analysis and Federal Reserve, June 2021. Notes: The chart shows the range of future PCE inflation levels over the Fed’s policy horizon, which we set at two years, that would be needed on average to make up for past inflation undershoots of the Fed’s 2% target. The undershoot is calculated as the average actual core PCE inflation over the previous two to five years. The red and yellow lines show the average of Fed forecasts of annual core personal consumption expenditure inflation in Q4 2021, Q4 2022 and Q4 2023 from its quarterly Summary of Economic Projections.

2. Fiscal boost

We saw significant fiscal stimulus provided globally in the wake of COVID-19.

Fiscal boost caused by COVID-19

Source: BlackRock Investment Institute, with data from Haver Analytics, July 2020. Note: solid orange bars show estimates of the discretionary fiscal measures in 2020 implemented in response to the Covid-19 pandemic. The light orange bars show the equivalent support for 2021, based on a range of estimates of measures from internal and broker sources. The green bars show the estimated impulse of monetary growth in China measured via total social financing (TSF), the broadest gauge of credit, stripping out local government debt purchases. The purple bars show the direct central bank support via programs such as the Term Funding Scheme for Small and Medium sized Enterprises in the UK and the Targeted Longer-term Refinancing Operations in the euro area aimed at ensuring flow of credit to banks in return for greater bank lending to the private sector.

3. Reopening surge

Excess savings from the pandemic have built pent up demand.

Personal income vs personal consumption

Source: BlackRock Investment Institute, Bureau of Economic Analysis, with data from Haver, January 2021. Notes: The chart shows U.S. disposable incomes and personal consumption expenditures rebased to 100 as of January 2020. We assume difference between the two as the excess savings buffer households have built up as a consequence of limitations on how people typically spend their income. The latest data do not include the stimulus payments distributed at the start of the year, which should add further to the savings buffer.

4. Supply chain and rising production costs

Year-over-year core CPI is at its highest level since 1991.

Year-over-year core CPI

Source: BlackRock Investment Institute, NFIB, Institute of Supply Management (ISM), U.S. Bureau of Labor Statistics, Philadelphia Federal Reserve and University of Michigan, with data from Refinitiv Datastream and Haver Analytics, July 2021. Notes: the orange line shows the net number of firms in the NFIB survey of small and medium-sized businesses reporting that they are currently raising their prices. A value of 0 indicates that the same number of firms are raising and reducing prices. The solid yellow line shows the annual change in the U.S. core CPI inflation rate.

Ways to address inflation in your portfolio

BlackRock believes investors must deliberate about finding opportunities across and within different asset classes to build portfolio resistance amid rising inflation.

  • Consider unconstrained strategies to generate a positive real yield and inflation-linked bonds over nominal bonds as a portfolio ballast.

    Learn more about BlackRock’s fixed income offerings.

  • Focus on value-oriented equities and quality companies with strong pricing power for upside capture.

    Learn more about BlackRock’s equities platform.

  • Enhance portfolio resiliency by seeking out exposure to commodity futures and commodity-related equities, which have historically outperformed during periods of high inflation.

  • Lean into core real estate and real estate debt to produce more income and decrease risk. Rental income from real estate assets often matches or exceeds inflation. Due to higher replacement costs, real estate values rise with inflation.

    Learn more about BlackRock’s real estate solutions.

  • Explore infrastructure as a diversified source of portfolio return. Many infrastructure assets have an explicit link to inflation through fixed contracts.

    Learn more about BlackRock’s infrastructure offerings.