The wish to protect against inflation is a base emotion within investor psychology: one that lies deep within.  Failure to offset inflation results in a decrease in real spending power. Over half a generation, the effects of this are meaningful; over multiple generations, families fall, countries fail and the formerly rich become only averagely endowed.

No sane investor would object to inflation protection: it would be akin to refusing indoor plumbing. However does the impetus to seek inflation protection entail investing differently from simply seeking to beat the rate of inflation, in the long run?

The question is: to what extent does the impetus to seek returns that are better than inflation result in a wish-fulfilment exercise? In this guise, certain assets are accorded inflation protecting powers and these attributes are then routinely overstated.

Our investigations suggest that several notable asset classes are flawed in this respect:

Commodities: historical returns should not be relied upon – due to a significant change in market structure, the long run expected return from commodities is lower than in the past

Inflation linked bonds: Investors have imperfect knowledge of how inflation linked bonds will perform under different inflation scenarios. Irrespective of theory, real yields may change when inflation rises and create losses for holder of ILBs

REITS should never be confused with the actual property they own. Direct property has good inflation protection features, but REITs do not

Gold: history provides little support for the contention that gold is an effective inflation protection asset

Equities do fine in moderate inflation environments but do not keep pace in high inflation environments

We all wish to beat inflation but it is not easily possible to commute this desire into being. That is because some assets are inimical to inflation, others are inherently unreliable, and the remainder are only partly reliable.

We contest that the asset with the best all-weather nominal (pre-inflation returns) is quite likely to have the best real (post-inflation returns).