Inflation: the return of a structural risk

• Christophe Rochat
  CIO
  Banque Heritage

The recent easing in financial markets stands in contrast to a number of factors that could fuel a new phase of inflation. Beyond the current energy shock, investors may face a more profound shift: a transition from a period of low macroeconomic volatility to an environment of more volatile prices, less predictable asset correlations and a higher premium on real assets.

The underestimated risks of returning inflation

The geopolitical shock in the Middle East has served as a stark reminder that energy remains at the heart of the global economic balance. The rise in prices of oil, natural gas and refined products was immediately reflected in price indices, reigniting an inflationary risk that many considered to be gradually under control. Nevertheless, after a period of nervousness, the markets opted for normalisation, believing that the disruptions would remain limited in both duration and scale.

This interpretation appears fragile. Economic history shows that energy shocks rarely exert their full impact at the very moment they occur. Their impact spreads gradually throughout the economy via transportation costs, supply chains, intermediate raw materials and, ultimately, the goods and services consumed by households. Second-round effects thus constitute the real risk for central banks and investors.

Several signals deserve particular attention. The tensions observed in fertiliser markets could lead to a delayed rise in food prices. The gradual reduction in strategic oil reserves also limits governments’ ability to cushion supply disruptions in the long term. Finally, the resilience of global demand and the persistence of relatively tight labour markets increase the risk of a more sustained pass-through to wages and prices.

In this context, it cannot be taken for granted that inflation expectations will remain firmly anchored. Bond markets certainly continue to reflect a high degree of confidence in central banks’ ability to contain inflationary pressures. However, the gap between this confidence and the underlying risks has not been as wide as it has been over the past few quarters.

Adapting portfolios to the new macroeconomic regime

Beyond the business cycle, investors must consider the possibility of a regime shift. The period of the Great Moderation, which lasted for over thirty years, was underpinned by powerful disinflationary forces: the globalisation of value chains, an abundance of labour, relative geopolitical stability and the high credibility of central banks. These factors simultaneously supported both equity and bond markets, facilitating particularly effective diversification.

Today, this environment is changing. The military build-up by major powers, geopolitical fragmentation, the energy transition, supply chain security and climate constraints are exerting sustained pressure on costs. Public deficits remain at historically high levels, whilst governments’ financing needs continue to grow. These dynamics are creating an environment in which inflation could become more volatile and more sensitive to supply shocks.

Certain forces are working against this trend. Artificial intelligence, automation and the associated productivity gains could help curb some price pressures. However, they are now up against structural inflationary factors of comparable, if not greater, magnitude.

For investors, the challenge is therefore not just the average level of inflation, but its volatility. In such an environment, historical correlations between equities and bonds become less reliable. Traditional diversification remains relevant, but can no longer be the sole source of portfolio resilience.

Real assets are thus regaining a strategic role. Infrastructure, energy, natural resources and property with index-linked features can help protect real capital when inflationary pressures intensify. Within bond portfolios, more sophisticated management of duration, inflation expectations and sources of return is also becoming essential.

The real question, therefore, is no longer whether inflation will occasionally rise above central banks’ targets. It is now a matter of determining whether investors have fully assimilated the fact that price stability is no longer the baseline scenario. In this new environment, knowing how to diversify macroeconomic risks and preserving the purchasing power of capital could once again become one of the key determinants of long-term performance.