Inflation is a hot topic as economies emerge from coronavirus lockdown and treasurers should be aware of their options for hedging it, but they need to decide whether the prospect of faster rising prices has been overstated.

Whether you are a company that purchases commodities from the other side of the world or a consumer doing their weekly shop, no one could have failed to notice that prices have risen since the start of the pandemic.

As previously reported, the US consumer price index was up 0.8% in April and has risen by 4.2% over the last 12 months, while the UK consumer prices index was up by 1.6% for the 12 months to April compared with 1% from March 2020-March 2021. On a monthly basis, UK inflation increased by 0.7% in April.

Rory McPherson, Head of Investment Strategy at Punter Southall Wealth says his firm envisages a period of structurally higher inflation driven by a combination of supply chain bottlenecks and pent-up savings being spent as economies reopen.

“The trajectory will be uneven and it is very likely to peak this summer before heading back down, but we believe it will likely rise from then to higher levels than we have witnessed for several decades,” he says.

However, Mike Coop (an asset manager at Morningstar Investment Management Europe) says we shouldn’t lose sight of what has kept inflation low for the past 30 years – intense global competition led by China’s growth machine, technology driving down costs, and inflation targeting by independent central banks.

“These factors have not gone away, so a lot would have to change for inflation to break out to 5% or beyond,” he says.

For those still concerned, Coop recommends buying inflation-linked bonds and notes that ‘real’ assets such as equities (stocks) and property tend to perform well when there is a moderate rise in inflation rates.

McPherson says his firm’s commodities investments gained 8% in April alone on the back of price rises in agricultural commodities such as corn, wheat and coffee. For companies that don’t want to buy stocks but still want to benefit from rising commodity prices, buying currencies of countries that are large commodity producers is another option.

A good example is the Canadian dollar since that country exports a diverse range of commodities including oil and timber, has a stable government, and Bank of Canada is expected to be one of the first major central banks to raise interest rates – a move that generally leads to a slowdown in inflation.

So how have corporates reacted to this mixed messaging around inflation? James Kelly, Group Treasurer at international learning company Pearson, notes that although his business is exposed to inflation through rental uplifts, IT costs and some input materials, hedging is not on the table for now.

“We don’t currently hedge inflation as the business has some ability to pass on price increases to customers and while it is a significant cost, its importance has been reducing as our cost base has reduced,” he says.

“If inflation increases in line with a general increase in activity resulting from Covid unlocking, the risk of cost increases with no sales improvement is low,” adds Kelly. “However, we are monitoring in case general inflation increases result from constraints in certain supply chains due to different industries and geographies unlocking at different rates.”

He acknowledges that the company may look at protection if this situation arises, although it expects any impact from higher inflation to last for months rather than years.

It’s a similar situation at multinational healthcare company Roche, where a treasury spokesperson said the company did not specifically hedge inflation risk and “was not overly concerned about inflation and its impact on our business.”

Ultimately, the decision on how to (or whether to) hedge against inflation risk should come down to each corporate’s view on how far and fast prices will rise and how this would affect their business.