The Market Underpricing Inflation? Vanguard Thinks So

The Market Underpricing Inflation? Vanguard Thinks So describes Vanguard Asset Management’s view that markets may be underestimating the risk of U.S. inflation persisting, fueled by volatile fuel-price dynamics. The firm linked its stance to oil-market signals, especially the crack spread—the gap between refined fuel prices and crude used to produce them—which reached a 2022 high. As crude fell after a fragile U.S.-Iran ceasefire, gasoline and other refined products did not drop in the same way, and rising fuel costs can keep inflation “sticky.” Vanguard’s active funds team opened a long position in short-dated inflation-protected Treasuries as a hedge. Vanguard’s head of international rates, Ales Koutny, said the team is monitoring whether the spread normalizes or becomes a structural factor affecting inflation risk. The article cites ongoing Middle East tensions, including reported attacks on ships in the Strait of Hormuz and renewed U.S. strikes, alongside changes to a June memorandum with Tehran. The team is also said to be revising models to incorporate individual oil distillates rather than crude alone.