Most likely the biggest question facing global financial markets today is the outlook for inflation. Inflation helps to shape the global economy and financial markets. Globally, central banks have adopted inflation targeting as their main objective, having been haunted by previous periods of hyperinflation and deflation. They have flooded the markets with liquidity and are willing to risk many unknown and unintended consequences just to get inflation back to its presumed comfort zone.
How should investors evaluate central banks’ behavior and how should they position their portfolios? Given the cumulative liquidity supply and additional post-Covid budgetary stimulus, should we fear hyperinflation or are authorities still just pushing on a string? This piece aims to address the inflation puzzle, in search of investment strategies that position a portfolio optimally for different inflation regimes.