Our analysis shows that PNR was a strong inflation hedge from 1973 to 1991 due to the unique economic environment and energy industry structure that prevailed during that period. However, after 1991, PNR’s hedging ability steadily weakened due to the rapidly changing economic environment, the structure of energy markets, and improvements in energy efficiency. Public natural resources can still be an inflation hedge, but its hedging ability depends on its underlying sector weights and is driven by economic events, such as the supply shocks being experienced in early 2022.
Our findings prompt a re-evaluation of the role public natural resources should play as an inflation hedge in an investor’s portfolio. To combat inflation under various economic environments, we believe investors will be best served by using a diverse “basket” of inflation-hedging assets that includes public natural resources, as well as TIPS, real estate, infrastructure, and commodities.