Since the last major inflation shock in the 1970s, the most significant change has been the growing adoption of explicit inflation targeting by central banks, which has helped establish greater coherence and credibility in monetary policy. For Andrew Cole, head of asset allocation at Baring Asset Management, the implication is that benchmark rates will be hiked hard to prevent price expectations getting out of control. This means the real cost of cash should be higher than in recent years, making a significant allocation to cash a suitable response to higher inflation. "Cash is an appropriate counterbalance to risk assets: it is cheap to manage and has few hidden costs," says Mr Cole. "Hedge funds and funds of funds may find it hard to beat cash-based returns."
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