The renaissance of consumer price inflation that globally started early 2021 to mid 2021 has once again raised the question of short to medium-term inflation hedges. While real assets in general may of course be considered as long-term inflation hedges, recent empirical evidence from 2021 to 2022 suggests that neither cryptocurrencies, nor gold or stocks in general did the short to medium-term hedging job. What seems to have done a good job though is stocks in the energy sector, which showed superior performance since about November 2020. This was in part due vaccine availability and the corresponding reopening of economies during the pandemic shock. But it was also due to energy driven inflationary pressures that improved energy stock margins.
This recent episode hence suggests that, at least, energy related inflationary pressure may be hedged contemporaneously with energy stocks that then outperform the broader stock market. As the energy sector by now is dominated by oil, we may conclude that the time-varying energy sector correlation with the overall market is central to inflation hedging. On a related account, in our 2021 Energy Economics paper “Hedging stocks with oil” we were able to show that oil futures can temporarily provide investors with stock market hedges. In normal periods these transient opportunities are marked by negative hedge betas that significantly deviate from zero. This scenario describes the case where markets and oil move in opposite direction. For example, a downswing in markets corresponds to an upswing in energy prices. This, now together with increased consumer price inflation, was what we observed during the 2021 to 2022 period.