Today’s retirement portfolios need a new inflation playbook

Real assets should become a strategic inflation shock absorber in retirement portfolios because the next decade is likely to combine slower real growth, higher inflation and greater volatility.

• Cohen & Steers forecasts U.S. consumer inflation to average 3.0% annually over the next 10 years, versus 1.6% in the previous cycle and the Federal Reserve’s 2.0% long-term target.
• The authors describe a shift from an “era of abundance” to an “era of scarcity”, with supply shocks linked to the pandemic in 2021, the war in Ukraine in 2023, tariffs in 2025 and the war in the Middle East in 2026.
• Actual inflation exceeded market-implied breakevens by an average of 2.05% each year over the period discussed, while traditional stocks and bonds have historically underperformed during rising or unexpectedly high inflation.
• Commodities benefit from scarcity premiums, natural-resource producers can pass higher input costs to customers, and real estate and infrastructure revenues may rise through inflation-linked leases, contracts or regulated pricing.
• Target-date funds generally have limited exposure to inflation-sensitive assets such as TIPS, listed REITs and commodities, while TIPS themselves can lose mark-to-market value when real interest rates rise sharply, as in 2022.

Takeaway: Investors approaching or drawing down retirement savings should retain equities and bonds but consider a diversified allocation to real estate securities, listed infrastructure, commodities and natural-resource equities, recognizing that real assets add diversification and inflation sensitivity rather than eliminating portfolio risk.