The expectations of inflation are skyrocketing. Michigan Survey of Consumers[1] The average forecast in April increased by 3.3% in January increased by 6.5%, and professional forecasts have also modified their estimates upwards. But history suggests that both groups often miss scars. The gap between the expected and real inflation has been wide and consistent, making it difficult to estimate when and how inflation will hit the portfolio. For investors, this uncertainty outlines the value of the actual property, which historically helped the hedge against the surprise that traditional property often fails to absorb.
Historically, it was felt that inflation levels have often been quite different from consumer and forecaster expectations. This is a subject that we do in some recent researches, “expected unexpected with real assets.” In this, we document the historical correlation between the expected inflation and real inflation (a year later). From the third quarter of 1981 to the first quarter of 2025, correlation is relatively low for consumers at 0.20 and only 0.34 is slightly higher for professional forecasts.
This piece examines the performance of the actual property in the atmosphere of various inflation, with special attention to the performance during the period of high expected and unexpected inflation. Historical evidence suggests that real assets, including objects, real estate and global infrastructure, are particularly effective for investors related to the risk of inflation. Therefore, regardless of the expectations of inflation, maintaining allocation for real property, is a great way to prepare a portfolio for unexpected.
Expected inflation
Expectations of future inflation vary over time and between a variety of investors. There are many types of surveys which are used to meet these expectations. For example, Federal Reserve Bank of Philadelphia[2] Since the second quarter of 1990, its “Survey of Professional Alertors” has been organizing the quarter.[3] Respondenms, including professional forecasts, who produce projections in fulfilling their professional responsibilities, are asked to provide their one year expectations of inflation (as measured by CPI).
In addition, the monthly survey of American homes of Michigan University has been asked, “What percentage do you expect about the expectation of going above average/below during the next 12 months?” There are also more collected models as Federal Reserve Bank of Cleveland[4],
Exhibit 1 consists of expectations for professional forecasts (defined as a response to Federal Reserve Bank of Philadelphia survey) and consumers (from Michigan Survey University) from January 1978 to May 2025.
Exhibition 1: Expectations of inflation: January 1978 to May 2025
Source: Counting of Federal Reserve Bank of Philadelphia, Michigan University and authors.
We can see that the expectations of inflation are quite different over time. While inflation from forecasts and consumers is often the same, with a correlation of 0.49 throughout the period, there are significant differences over time. For example, while inflation expectations from forecasts have been relatively stable, consumer expectations have demonstrated high level variability – especially recently.
Expectations around inflation – such as for investment returns – play an important role in portfolio construction. The notion of inflation often serves as a fundamental input in assessing asset withdrawal expectations (ie, capital market beliefs). As a result, when the expectations of inflation are low, some investors may raise questions on the value, including the real assets that are usually used to reduce the risk of inflation in their portfolio.
An idea, however, is that historically an error has occurred in the forecast of inflation. For example, in June 2021, the expected inflation for the later 12 months between professional forecasts was around 2.4%, while the actual inflation during a period of one year of that future was about 9.0%. This difference of about 6.6%, or estimation error is called unexpected inflation. The relationship between the expected inflation and real inflation (one year ahead) has been 0.34 for forecasts and 0.20 for consumers, which displays unexpected effects may be unexpected inflation. Simply put, while the forecast of future inflation has been somewhat useful, there have been significant differences between historically seen inflation and expected inflation.
Real assets and inflation
Understanding how different types of investments make different types of inflation environment, especially different periods of unexpected inflation, are important to ensure that the portfolio is as diverse as possible.
Actual assets, such as objects, real estate and infrastructure are usually quoted as a significant diversist against inflation risk. They are not always beneficial that, however, when the risk and returns of these assets are seen in isolation. This effect is painted in exhibition 3. Panel A refers to historical risk (standard deviation) and Q3 shows returns to various asset classes from 1981 to Q4 2024. Panel B PGIM quantitative solution Q4 2024 displays future returns and risk based on capital market assumptions (CMAs).
Exhibition 2: Return and Risk for different asset classes
Source: Morningstar Direct, PGIM Quantitative Solutions Q4 2024 Counting Capital Market Assessment and Autors.
We can see in Exhibit 2 that the actual property, including objects, global infrastructure and REIT, appears to be more traditional fixed income and historically relatively incompetent compared to the more traditional fixed income and equity asset classes when plotted on a traditional efficient frontier graph (in panel A). However, while they can still be relatively less efficient when using forward looking estimates (in panel B), the expectations around the low risk-proper performance are compressed.
When thinking about the potential benefits of investment in a portfolio, however, not in isolation, it is important to look at the effect of an allocation as a overall. Not only actual assets have less correlation with more traditional asset classes, but they also work as significant diversified when inflation differs from expectations (ie the duration of highly unexpected inflation). This effect is documented in exhibition 3, which includes the asset class returns correlation with both the expected and unexpected inflation levels, based on the expectations (panel A) and consumer expectations (panel B) of the professional forecasts.
Exhibit 3: Asset Class Return Correlation required and unexpected inflation level: Q3 1981 from Q4 2024
Source: Counting of Morningstar Direct, Federal Reserve Bank of Philadelphia, Michigan University and authors.
We can see in exhibit 3 that more traditional investment, such as cash and bonds, are positively correlated with expected inflation. This means that expectations around inflation increase, the return of future feeling for these asset classes has increased (most of the building conforms to the block model). However, these more traditional asset classes have not performed even when unexpected inflation is high and usually displays negative correlations with inflation. In particular, when unexpected inflation is relatively high, more traditional property gives average low returns.
In contrast, real assets, especially in objects, had a strong performance during the period of historically high unexpected inflation. While three actual assets have been considered in relation to unexpected inflation, they demonstrate high (positive) correlations for inflation than each collective assets classes. It is not necessarily surprising to see the body of research on the potential benefits of allocating actual assets, but it provides a useful reference as to provide a useful reference as to include the real assets in a portfolio, especially the risk of inflation can be valuable for investors, as the actual assets have performed better during high inflation periods when other traditional property is not more traditional property.
key takeaway
The real property may seem unnecessary when the expectations of inflation are silent. But this visual sees an important lesson from history: this is inflation No Hopefully it is most often important. Coming in contact with real assets helps in the position portfolio to maintain weather surprise and purchasing power, especially for retirement or near nearby houses, where the risk of inflation can affect the most directly long -term financial security.
[1] https://data.sca.isr.umich.edu/data-archive/mine.php
[2] https://www.philadelphiafed.org/surveys-and-data/real- time- data-Research/inflation-forecasts
[3] Before it used the data used to return to the American Statistical Association (ASA) and National Bureau of Economic Research (NBER) in the fourth quarter of 1968.
[4] hts