Key Highlights

  • The Fed's preferred inflation measure reached 4.1% in May, never having fallen to its 2% target since early 2021.
  • 54% of fund managers surveyed by Bank of America expect a "no landing" for the global economy in the next 12 months.
  • A Bloomberg index of American Treasuries has lost over 20% of its real value amid persistent inflation.
  • Gold has lost nearly a quarter of its market value since a peak in January despite continued inflation.

A Shift From "Hard Versus Soft Landing" to "No Landing"

For much of the early 2020s, financial market discussions centred on whether central bankers could cool overheated economies without triggering a recession, a hard landing, or manage a soft landing in which inflation faded while growth continued. A third scenario, no landing, in which both inflation and growth kept running hot, was typically dismissed by central bankers who insisted their institutions took inflation targets seriously.

Today, however, the world's most important central bank appears to have effectively entered a state of perpetual flight. The Federal Reserve's preferred measure of American inflation never fell to its 2% target, bottoming out at 2.3% over the 12 months to April 2025, with the latest May reading at 4.1%. Prices have risen almost as quickly in Australia at 4%, and remain above target in Britain at 2.6% and the euro area at 2.8%.

Persistent Inflation Expectations Take Hold

Both investors and consumers now expect above-target inflation to persist. In Bank of America's most recent monthly survey of fund managers, 54% of participants expected a no-landing outcome for the global economy over the coming 12 months. In the University of Michigan's latest consumer survey, the median respondent expected inflation of 4.2% over the next year. The rise in energy prices since February, when America and Israel began military action against Iran, has worsened the picture, though the more fundamental issue is that inflation has not fallen below 2% since early 2021, leading University of Michigan respondents to now expect inflation to average more than 3% over the long run.

Real Assets Have Rewarded Investors Through the Inflationary Period

The clearest lesson from the past five years of high inflation is that claims on real assets and income streams have been worth paying for. With the exception of China, all of the world's biggest stock markets have performed somewhere between reasonably well and spectacularly since consumer prices took off in 2021, a result attributable partly to surprisingly fast earnings growth and, relatedly, rapid progress in artificial intelligence. Even without these tailwinds, shares would still represent claims on real earnings that rise alongside other prices, offering some protection against inflationary erosion.

By similar logic, bonds, most of which promise only fixed nominal payments, have delivered a difficult half-decade for investors. A Bloomberg index of American Treasuries has lost over 20% of its real value, with most of that decline stemming from inflation's corrosive effect on fixed-dollar coupon and principal payments, and the remainder from rising yields that push down the prices of existing bonds. Should current bondholders fear future inflationary surges, they are likely to demand even higher yields in compensation, anticipating a repeat of this same double impact.

Even Inflation Hedges Have Faced a Volatile Path

A final lesson is that inflation sends even assets which outpace it over the long run on a volatile ride. Gold, the classic hedge against currency debasement, has lost nearly a quarter of its market value since peaking in January. Though inflation has persisted, investors have grown concerned that a previous mania for the metal, sparked by those attempting to inflation-proof their portfolios, had pushed prices into bubble territory. In 2022, shares and commercial property values fell alongside bonds amid concerns about the effects of sharply higher interest rates, illustrating that no asset class has proven immune to volatility during this period.

A Less Stable World, but One Investors Have Adapted To

The no-landing environment is inherently less stable, since high inflation does more than simply devalue currencies; it also prompts investors and consumers to behave more erratically, generating additional volatility of its own. For this reason, it was common a few years ago to hear the no-landing scenario described as merely an intermediate state, with the expectation that such a bumpy flight would eventually have to land. That kind of talk, however, has largely faded, suggesting markets have increasingly come to accept persistent above-target inflation as a durable feature of the current environment rather than a temporary condition awaiting resolution.

Conclusion

The past five years offer a clear set of lessons for investing amid persistent inflation: real assets and income-generating claims have generally rewarded investors, while fixed nominal payments embedded in bonds have proven a costly holding, and even traditional inflation hedges like gold have experienced substantial volatility of their own. With inflation expectations among both investors and consumers now anchored well above central bank targets, the durability of this no-landing environment may depend less on whether policymakers can eventually bring inflation back to target and more on how effectively markets continue adapting to a world where that target increasingly appears out of reach.