HSBC Asset Management's multi-perspective report, "Investing Across a New Inflation Regime1,” marshals a foreword by Stephen D. King, HSBC Senior Economic Adviser, alongside specialist views from the firm's multi-asset, equity, fixed income, and real assets teams to make one overarching argument: the investment frameworks built during three decades of low, stable inflation need to be rebuilt for a world where inflation is higher, more volatile, and more structural.
The foreword sets the tone with no equivocation. King observes that "inflation has returned. Many thought it was an economic problem buried in history books." That era, he argues, is definitively over. The bull market in bonds that suppressed long-term rates from the early 1980s onward has abruptly reversed. Central bank policy rates are materially higher. And the credibility of inflation-targeting frameworks is no longer something investors can take for granted.
Three Regimes, One Break
The macroeconomic section frames the analytical backbone of the report. US post-war inflation can be read through three distinct regimes: high and volatile from the 1960s to the early 1980s; disinflation from the Volcker era onward; and a long period of stable, low inflation from the mid-1990s to 2020, as the Federal Reserve adopted de facto inflation targeting. Over that roughly 25-year span, US PCE inflation averaged 1.8 percent. Since 2021, it has averaged around 4.0 percent, double the Fed's stated objective.
The base case, importantly, is not a return to 1970s-style stagflation. What the report argues instead is a world of greater volatility, one where 2 percent acts more like a floor than a ceiling. Three structural forces sustain this shift: more frequent supply shocks driven by deglobalisation and geopolitics, ageing-driven labour supply constraints, and fiscal strain from already-high debt and rising entitlement spending.
King's foreword sharpens this point with historical force. He notes that governments facing fiscal strain have limited and dangerous options: financial repression, default, devaluation, or inflation. As he writes, "from the Ancient Romans through to Revolutionary France, and from the Confederacy during the American Civil War through to 1970s Britain and its IMF bailout, desperate leaderships have too often turned to the printing press." The possibility of fiscal dominance displacing central bank independence is treated as a tail risk, but a real one.
The Correlation Problem
For multi-asset portfolios, the most consequential structural shift is what elevated inflation does to the equity-bond relationship. The report is direct: as inflation rises, the correlation between these asset classes tends to increase, reducing the effectiveness of the classic balanced portfolio, while overall market volatility also rises, particularly during stagflationary environments. The 2022 episode, where both equities and bonds sold off simultaneously as inflation and aggressive rate hikes hit together, is cited as the cleanest recent example. Simple inflation playbooks failed. Diversification became elusive.
The prescription is to broaden the diversification toolkit. Real assets with inflation-linked revenues, shorter-dated inflation-linked bonds, securitized credit carrying floating-rate coupons linked to SOFR or SONIA, and liquid alternatives employing trend-following approaches all find a role in the report's framework. These are not exotic solutions. They are practical responses to a correlation regime that has changed.
Pricing Power Is the Differentiator
Both the European and global equity sections converge on the same conclusion: equities are not a reliable blanket inflation hedge. The 1970s demonstrated this vividly. Although nominal earnings growth held up, higher costs and margin compression drove real earnings growth close to zero. The report emphasizes that equity returns are driven by three key factors: earnings growth, dividend income and changes in the equity risk premium. Persistent inflation can affect each of these differently.
The variable that separates winners from losers is pricing power, defined here as the ability to protect margins by passing higher costs on to customers without damaging demand. This can arise from strong brands and market share, intellectual property, a favourable position in the value chain, or purchasing power over suppliers. Equally important is management quality and the operational flexibility to redesign products, adjust pricing structures, or absorb costs temporarily to strengthen competitive position. Companies that can sustain free cash flow and grow dividends in real terms across economic cycles are, in the report's framing, the assets most worth owning.
Real Assets: Pass-Through, Not a Label
Listed infrastructure and listed real estate are examined in detail, and the report issues a notable caution against treating them as a homogeneous "real assets" allocation. The decisive variable is not the asset class label but the mechanism of inflation pass-through: regulated tariffs, rent indexation, contractual price escalators. Listed infrastructure has historically been more resilient than listed real estate in higher-inflation regimes, because contractual and regulatory frameworks allow inflation to be passed through more effectively and help offset the impact of rising discount rates. Listed real estate, conversely, has historically performed best when inflation and interest rates are low and falling.
Securitized credit earns its own section. The floating-rate income it generates, with coupons linked to SOFR or SONIA, means cashflows can rise as policy rates remain elevated. Its performance is driven by collateral fundamentals and structural protections rather than duration or corporate balance sheets, providing a differentiated return stream alongside government and corporate bonds.
Five Key Takeaways for Advisors and Investors
- The inflation regime has structurally shifted. The 25-year era of 1.8 percent average PCE inflation is over. A world where 2 percent is a floor rather than a ceiling, driven by deglobalization, demographic constraints, and fiscal strain, requires fundamentally different portfolio construction assumptions.
- The 60/40 diversification assumption is unreliable in this environment. Rising equity-bond correlations in inflationary regimes mean the traditional balanced portfolio offers less protection than it once did. Advisors need to complement traditional allocations with real assets, inflation-linked instruments, and liquid alternatives.
- Equities require genuine selectivity, not broad exposure. Companies with durable pricing power, resilient free cash flow, and competitive dividends will outperform. Sector and stock selection matter far more in a higher-inflation regime than they did in the low-volatility, low-rate era.
- Inflation-linked bonds and securitized credit deserve deliberate allocation. Shorter-dated inflation-linked bonds can offer more effective purchasing-power protection when rates are rising. Securitized credit, with floating-rate coupons and structurally senior positions, adds differentiated income and diversification within fixed income.
- Fiscal risk is a long-term tail risk that cannot be ignored. King's historical perspective on government debt and the temptation to inflate is not a near-term forecast. It is a structural warning. Portfolios designed for fiscal stability as the baseline assumption may be underweighted to scenarios where that assumption erodes.
Footnote:
1 King, Stephen D. "Investing Across a New Inflation Regime." HSBC Asset Management, 6 Aug. 2026, https://www.assetmanagement.hsbc.co.uk/en/institutional-investor/news-and-insights/investing-across-a-new-inflation-regime.
