Rising inflation levels in the US and other developed markets have had everyone asking whether the trend is transitory or something more structural? Although we do not have stagflation as our base case, we believe the risk of a return to a higher inflation environment has increased and the range of outcomes investors need to consider has widened.[1] As we explain in our main inflation protection paper[2], we recommend asset owners reassess whether their portfolios are positioned for such a scenario and consider exposure to asset classes that can help with this. Such a process should inevitably consider commodities, in our view.


Commodity investments have historically been viewed as inflation-hedging assets, given their structural linkage to the inputs to inflation. In the past commodity futures returns have magnified changes in inflation expectations, particularly in periods of strong economic growth. Although they lack a contractual link to inflation (as would be found in an inflation-linked bond or inflation swap, for example), this strong sensitivity has made them a credible candidate for inclusion in inflation-hedging portfolios, in our view.


There are many aspects of the relationship between commodities and inflation, each of which we discuss below:


As part of the cost structure, a commodity investment can naturally hedge against the effects of cost-push inflation.


Economic transformation drives demand for commodities – urbanization and decarbonisation are structural forces that could impact prices over the longer term.


Commodities are not homogenous – both short- and long-term dynamics may favour some commodities over others, particularly when ESG considerations are factored in.


Gold, in particular, is very different from the rest – it is a “fear asset”, and has performed most strongly when markets are either very weak or very nervous about high and rising inflation, or monetary expansion.


View the full paper here - Commodities in an inflation-aware portfolio.


[1] See Mercer’s hub, The return of Inflation?: https://www.mercer.com/our-thinking/wealth/inflation.html

[2] See Mercer’s paper, Inflation protection — Hope for the best, but build robust portfolios: https://insightcommunity.mercer.com/research/615bd8fc933b5e002186e73d/Mercer_Inflation_protection


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Past performance is no guarantee of future results. The value of investments can go down as well as up, and you may not get back the amount you have invested. Investments denominated in a foreign currency will fluctuate with the value of the currency. Certain investments, such as securities issued by small capitalization, foreign and emerging market issuers, real property, and illiquid, leveraged or high-yield funds, carry additional risks that should be considered before choosing an investment manager or making an investment decision.

This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.

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