Big investors brace for inflation risk

Money managers at some of the world’s largest asset firms are repositioning portfolios to guard against inflation risks they believe are being underestimated by wider financial markets, even as headline measures show easing price pressures across major economies.

Executives and portfolio managers at BlackRock, Bridgewater Associates and Pacific Investment Management Co. have signalled that persistent cost pressures, supply-side constraints and policy uncertainty could reignite inflation volatility, challenging assumptions that central banks are on a smooth path towards sustained price stability. Their caution stands in contrast to broad market pricing that points to moderating inflation and a gradual easing cycle by major monetary authorities.

At BlackRock, the world’s biggest asset manager, senior investment leaders have highlighted what they describe as a structural shift in inflation dynamics. They argue that global supply chains remain fragile, labour markets tight in several advanced economies, and fiscal policy more expansionary than in previous decades. These factors, they say, increase the probability of inflation re-emerging in bursts rather than settling back to pre-pandemic norms.

Portfolio disclosures and public commentary indicate BlackRock has increased exposure to inflation-linked bonds and real assets, while reducing duration risk in parts of its fixed-income portfolios. The firm has also favoured equities with pricing power, arguing that companies able to pass on higher costs are better positioned if inflation surprises on the upside.

Bridgewater Associates, founded by Ray Dalio, has expressed similar concerns in its macro outlooks to clients. The hedge fund has warned that markets may be overconfident about the speed and permanence of disinflation, particularly as geopolitical tensions, energy transition costs and demographic shifts reshape the global economy. Bridgewater has positioned parts of its flagship funds to benefit from higher inflation volatility, including through commodities and inflation-sensitive strategies.

Pacific Investment Management Co., one of the largest bond managers globally, has also adopted a guarded stance. Pimco’s investment committee has argued that while inflation has slowed from peaks seen during the post-pandemic rebound, underlying pressures linked to services inflation and wage growth remain elevated. The firm has emphasised flexibility in duration positioning and a selective approach to credit, reflecting concerns that inflation shocks could force central banks to keep policy tighter for longer than markets expect.

Market indicators, however, tell a different story. Break-even inflation rates derived from government bond markets in the United States and Europe suggest investors broadly expect inflation to continue moderating over the medium term. Equity markets have rallied on the assumption that interest rates are near their peak, while risk assets have benefited from expectations of policy easing later in the year.

The divergence highlights a growing debate within global finance about whether the inflationary surge triggered by pandemic disruptions and stimulus has fundamentally altered the economic landscape. Some economists argue that technological advances, ageing populations and slowing growth will ultimately exert downward pressure on prices. Others, including the asset managers taking defensive positions, contend that these forces are being offset by deglobalisation, higher defence and infrastructure spending, and climate-related investment demands.

Central banks themselves have offered mixed signals. While policymakers have acknowledged progress in bringing inflation down, many have stressed the need for vigilance. Officials in the United States and euro zone have repeatedly cautioned that premature easing could risk undoing gains made in stabilising prices, particularly if inflation expectations become unanchored.

For investors, the stance taken by firms such as BlackRock, Bridgewater and Pimco underscores the complexity of navigating the current environment. Inflation-linked securities, commodities and real assets have regained attention as potential hedges, while traditional assumptions about the negative correlation between bonds and equities have been questioned after periods when both asset classes fell simultaneously.