Infrastructure as Hedge against Inflation – Fact or Fantasy?

Abstract

Infrastructure is often deemed a natural hedge against inflation due to monopolistic pricing power, supporting regulatory regimes, and limited variable cost exposure. In contrast to this often cited yet not empirically corroborated proposition, we find that domestic listed infrastructure hedges inflation just as good (or bad) as other equities. This result holds across infrastructure sectors, time and estimation methods. Only portfolios of infrastructure firms with high pricing power can slightly improve inflation hedging compared to equities and average infrastructure. Our study is based on a rich dataset covering 1,400 infrastructure firms, 45 countries and over 30 years. Pricing power is proxied by country, time and sector specific OECD data on entry barriers, vertical integration and market structure in infrastructure industries. We apply spatial correlation consistent standard errors and correct for overlapping data using a matrix transformation. Ultimately, infrastructure as an enhanced inflation hedge appears to be rather wishful thinking than empirical fact.