Inflation: Expensive to Hedge
Even if an inflation shock is not part of our core scenario, it remains a risk that deserves our attention. However, it has become very difficult to hedge against this risk because of the cost. Different inflation-related assets such as energy, gold or inflation breakevens are all expensive for different reasons. The term structure of oil barrel futures prices is ascending: hedging the risk of an inflationary shock with oil currently costs 5% per year on the WTI market. Gold, which is driven by multiple factors such as uncertainty, real rates, the dollar and inflation, has seen its price soar, leaving it vulnerable to corrections as we have seen in recent days. Finally, inflation breakevens have risen rapidly from 0.6% to 1.6% and are now displaying a negative carry, with actual inflation remaining below expected inflation at this stage. As such, it is currently difficult to hedge inflation risks with these assets in view of their risk and cost.
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