Non-Profits: Should Inflation Risk Management Be Your Goal?

Executive summary:

  • Although it is more difficult to achieve CPI + targets when inflation is elevated, periods of rising inflation1 are the most problematic.
  • Adjusting a portfolio to reduce exposure to unexpected inflation can cause the portfolio to be more exposed to other macroeconomic shocks, such as declining growth.
  • Unless inflation poses a specific risk to your organization, we believe the best route forward is likely a diversified portfolio that is as robust as possible across different economic environments.

Over the past two years, higher inflation has led to a higher return hurdle for investors who have established real return objectives, making it harder for them to achieve their return objectives over the short term. But is this likely to be the case over the long term as well?

Let's take a look by addressing the following three key questions:

  1. To what extent does inflation reduce the probability of meeting an expected CPI + (consumer price index plus) target over the intermediate to long term?
  2. Is inflation the only risk non-profit organizations should seek to manage, or are other macro risk factors potentially as important?
  3. Can investors simultaneously minimize a portfolio's sensitivity to all macro risk factors through long-term asset allocation decisions?