Hotter-than-expected inflation data has rekindled investor anxiety about the durability of price pressures, prompting a wave of fresh interest in inflation-hedging strategies.
For Matthew Bartolini, Global Head of Research Strategists at State Street Investment Management, the numbers suggest this is not a temporary blip. He’s been sharing his insights with InvestmentNews.
"Inflation has become a more durable risk factor," he says. "While energy prices have been a recent catalyst, slower-moving measures (such as Atlanta Fed Sticky CPI at 3.0% and Sticky CPI ex-shelter at 2.8%) have also moved higher, signaling persistent underlying inflation driven by structural forces."
Energy's footprint, Bartolini argues, extends well beyond the pump.
"Energy's impact has had cascading effects across goods and services that rely on petroleum inputs, including groceries, hotels, and transportation. As a result, Supercore CPI — which strips out housing and energy — has continued its upward trend throughout the year and now sits well above 3%."
One factor that is drawing increasing attention is the build-out of artificial intelligence infrastructure.
"Beyond tariffs and supply chain reconfiguration, another non-transitory force is emerging: the AI-driven capex cycle," Bartolini says. "The build-out of infrastructure and memory is intensifying competition for critical inputs, creating a near-term inflation impulse, even as longer-term productivity gains remain further out."
The upstream data is reinforcing the picture. "Recent PPI reports highlight sharp increases in manufacturing components and processed materials, with finished goods prices rising at the fastest pace since 2022. Similarly, ISM surveys show the highest prices-paid readings since 2022 — evidence of continued cost pressures across production."
Against this backdrop, investors have been returning in force to inflation-linked bond ETFs. Bartolini points to a shifting macro narrative as the primary driver.
"Investor interest has returned as the progress made in late 2024 and early 2025 toward bringing inflation closer to the Federal Reserve's 2% target has stalled amid a shifting macro backdrop. That backdrop now reflects a move from globalization to deglobalization, and from cooperation to fragmentation — forces that are creating renewed upward pressure on inflation, alongside the AI-driven capex cycle."
The performance of inflation-linked bonds has validated that positioning.
"Inflation-linked bonds have outperformed nominal bonds by 2.3% cumulatively since the start of 2025," he notes. "Structurally, these bonds accrue an inflation premium, and over the past 18 months, realized inflation has exceeded expectations. That dynamic has supported performance and rewarded investors seeking inflation resilience."
Commodities have also enjoyed a surge of demand, with broad commodity ETFs attracting significant inflows in 2026. Bartolini explains why: "Historically, commodities have exhibited a roughly 0.35 correlation to movements in CPI, and that relationship is playing out in current market trends. Commodities are up 32% year-to-date and 44% over the past year."
Within the asset class, energy remains the centrepiece.
"Energy commodities tend to have the strongest relationship with inflation. Reflecting current dynamics, energy commodity ETFs have seen $400 million of inflows in May and $1.2 billion year-to-date in 2026, including $1.3 billion over the past three months. Similarly, given the tight linkage between oil prices and energy sector earnings, Energy sector ETFs have attracted $1.4 billion in May, bringing 2026 inflows to $13.5 billion."
For advisors weighing how to deploy these instruments, the risk profiles of inflation-linked bonds and commodity ETFs differ in important ways.
"Inflation-linked bond ETFs carry native bond risk, meaning they are also rate sensitive because they have duration," Bartolini explains. "If rates were to rise, inflation-linked bond ETFs could still have negative returns from duration-induced price declines — even if the rise in rates was to help limit inflationary pressures."
The implementation choice therefore matters greatly. "If added out of cash holdings, while inflation resiliency would be added, so would duration risks. Swapping nominals for inflation-linked bonds may help mitigate duration risks while infusing inflation resiliency."
Commodities present a different set of trade-offs.
"While they have a positive reaction function to rising inflation dynamics, they are also growth-biased, given that they have real world use cases,” he adds. “Positive aggregate demand can help support commodities, while restrained growth — and aggregate demand for goods and services — could weigh on commodity prices."
That growth sensitivity, Bartolini argues, actually makes commodities a useful complement to inflation-linked bonds within a portfolio.
"This is the opposite of inflation-linked bond exposures, which are more falling-growth biased. Pairing them together can help balance growth dynamics while still overlaying a positive bias to upward inflation risks," he says.
He also points to a deeper structural logic for how each asset class should be sourced within a portfolio.
"Commodities have historically had a positive correlation to global equities but a negative correlation to global bonds. Sourcing a commodity position from an equity allocation could help retain a bias to rising growth but overlay rising inflation trends — leading to more economic diversification. Meanwhile, sitting next to the bond allocation helps add asset diversification because of the negative asset class relationship, historically."
Some observers have questioned whether the ETF inflows represent a tactical reaction to recent data rather than a genuine strategic reorientation. Bartolini pushes back firmly.
"Flows across broad commodities and inflation-linked bond ETFs are not an April/May 2026 response, as we have seen inflows over multiple months throughout the past year. In fact, inflation-linked bond ETFs have had inflows in 16 out of the last 17 months. And broad commodity ETF exposures have had inflows in 11 out of the last 12 months."
The consistency of those flows, he believes, reflects a deeper recalibration. "It's not a knee-jerk tactical shift but a slowing realization that the macro backdrop has been altered. And that the significant macro shifts are proving structural, not transitory. From globalization to deglobalization and cooperation to self-sufficiency, these shifts are reshaping capital flows, the cost of capital, and inflation dynamics."
For advisors who might be tempted to wait for clearer signals before acting, Bartolini's message is pointed. "The current backdrop is complex — and unlikely to become less so. The greatest risk is that investors predict inflation will moderate and not make any adjustments. In this case, it's more rational to prepare."
He warns against portfolios built for a single macro scenario. "A portfolio built for a single set of macro conditions, like rising growth and falling inflation — i.e., goldilocks — is increasingly exposed to abrupt shifts, leaving traditional diversification less reliable. Today, diversification must do more than manage risk — it must help balance portfolios to remain resilient across a wider range of outcomes."
The practical takeaway, he concludes, is to think beyond conventional allocations.
"In a market defined by unpredictability, the challenge is not predicting the regime — but building portfolios designed to perform across a wider range of outcomes. To help build durability in this environment, investors may consider commodities or gold to complement traditional assets, hedge inflation volatility, and broaden portfolio balance," he concludes.
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