Governments globally continue to flood markets with capital while central banks cut interest rates to nominal levels in an effort to combat the financial crisis. Though these emergency measures may be essential to prevent any further contraction of financial markets, they could have serious, unintended inflationary consequences down the road.
A new research report, Expecting the Unexpected: Using Commodities as an Inflation Hedge, released by the Credit Suisse Total Commodity Return Strategy team, examines how investing in commodities could provide a diversified hedge against inflation, especially unexpected changes to inflation, while helping to improve a portfolios overall risk/return profile. Some key findings from the report include:
-The magnitude of the stimulus plans has many on alert that these large liquidity injections could lead to a significant spike in inflation;
-A situation where prices change unexpectedly could pose a higher risk to an investment portfolio;
-Commodities tend to be one of the few asset classes that may not only act as a hedge against, but may also benefit from, rising inflation; and
-Because commodities are typically uncorrelated to other asset classes, a broad commodity index based investment can provide diversification benefits that cannot be achieved with other tools such as Treasury Inflation Protection Securities (TIPS).
L.D.