In the Core of the Storm: Revisiting Inflation Hedging Properties Within and Across Asset Classes

Abstract: The recent surge in inflation has reignited discussions on hedging inflation risks, forming the focal point of this study. In our paper we consider conventional asset classes from 1968 to 2023 as well as alternative assets from 2020 to 2023 and find that no asset class provides a statistically significant hedge against core inflation shocks, while commodities and currencies can hedge headline and energy inflation risk. Consequently, our analysis highlights a consistent negative risk premium associated with core inflation risk across all time periods considered, which remains robust for both in-sample and out-of-sample shocks. Notably, the isolation of active trading strategies reveals an insignificant positive core inflation risk premium, opening a potential avenue to mitigate the price of inflation risk within portfolios. Moreover, we find that the negative beta of bonds and stocks on core inflation shocks can help to explain the changing sign of the bond-stock correlation.