Unanticipated inflation can adversely affect capital gains and fixed incomes. It is important for banks and other financial institutions to evaluate the prospect for future changes in price levels. In the United States, low inflation levels have created uncertainty surrounding the top-down policy measures that directly affect prices.
This Milliman Insight paper by Patrick Humes examines recent monetary policies that were employed to create inflation. It offers perspective on why these measures were not effective. Additionally, the paper outlines the proposed fiscal policies of the new administration and its prospect for increasing prices.
The Society of Actuaries (SOA) recently came out with the 2011 Risks and Process of Retirement Survey (see the full report). It is the sixth biennial study on post-retirement risks and how they are managed. The next few weeks’ polls are part of our series highlighting some of the same concerns brought up in the SOA survey results. Afterwards, we’ll compare your answers, to those of the general public. To start things off we’re wondering how our readers foresee inflation affecting their retirement plans.
Using commodities as an inflation defense is the subject of a recent white paper written by Bryan Decker, managing director and chief investment strategist, and Marlo Palumbo, research analyst, of Evaluation Associates, a Milliman subsidiary.
The authors address what they see as an underuse of commodities in asset allocation, despite strong historical data providing evidence of their utility for institutional portfolios.
They argue that the virtues of investment in commodities—attractive returns, inflation protection, low or negative correlation to traditional investments—can compensate for their volatility, especially when traditional markets are weak and the threat of higher inflation is real.
Their study examines the nature and history of commodities, outlines reasons to own them, and discusses how to make them part of an effective asset allocation strategy.
Because of the anxiety-inducing volatility that marks commodity investing, the authors conclude that an actively managed, long-only commodity strategy is probably the best approach to hedge against inflation.