Keeping It Real: AI, Inflation, and the Search for Returns

George Bory: Hi, I'm George Bory, chief investment strategist for Fixed Income at Allspring Global Investments, and welcome to SpringTalk. Today, I'm excited to be joined by Rushabh Amin, senior portfolio manager on Allspring’s Multi-Asset team. Rushabh, thanks for being here.

Rushabh Amin: Thank you for having me today, George. It’s a pleasure.

George Bory: It's a critical point in time. 2026 is proving to be an inflection point for markets, for policies, and for economies. We've got some big, big macro forces all converging and interplaying between each other. These include the interplay between fiscal and monetary policy. It includes the build out of a massive AI infrastructure and ongoing military conflicts that continue to ebb and flow but flare up at times and create supply-side shocks that we haven't seen in decades. And, so, it's in the context of this type of market that inflation-beating strategies, real-return-oriented strategies become critically important for an investor. So, with that, let's dive in. Let's think a little more deeply about this. Let's talk about the factors and talk about the strategies that get us there. Rushabh, let's talk inflation in the macro backdrop. I touched on what I think are the big three or what we at Allspring think are the big three. How are you and the team thinking about inflation and growth in this context and how the broader macro backdrop is shaping up from a fundamental perspective?

Rushabh Amin: On the team, we start with inflation growth as our starting point. So, at the moment, we're seeing persistently high inflation, but growth is also really, really resilient. Since 2022, despite inflation being quite a bit above the Fed's (Federal Reserve’s) target level, growth has been really, really strong. What we've seen over the last couple of quarters is a bit of a moderation in that growth after a bumpy year in 2025, and we are starting to see a bit more easing on the inflation side as we look ahead. However, many sectors of the economy remain persistent or sticky when it comes to inflation. What has been surprising to us, perhaps, is that inflation expectations have remained incredibly well anchored in this backdrop. You mentioned the ebb and flow of geopolitical tensions and how they feed into supply-side shocks. In that context, we've seen two very large ones over the last couple of years. What we have found is that inflation expectations have remained really, really resilient. One of the reasons for that, we think, is that consumers are a bit fatigued after a kind of bumper pandemic-era stimulus and a drawdown of those savings through time, leading to more selectivity as to where that money is spent in the economy. Somewhat of a lag policy effect that we saw with past hikes is still feeding a bit into economic activity today, but that is counterbalanced a bit with the AI (artificial intelligence) build-out, as you've mentioned, the large, large build-out that's expected—I think around $6 trillion of total spending expected over the next couple of years—has kept the economy fairly buoyant. First, focusing a bit more just on inflation, we do expect moderate but persistent inflation over the next couple of years due to some of those factors that you've already alluded to.

George Bory: Let’s take that one step further. You know, defining inflation is critical. Beating inflation is critical. But as you just mentioned, we're in an environment where what we're experiencing is debt-fueled growth. Countries are borrowing, companies are borrowing. There's huge economic benefits of that money coming into the system. It's very high impact. But the persistency of that kind of input means inflation stays pretty high. The tension is at the policy level between, say, the Fed, who has an objective to maintain or preserve some inflation-fighting credibility and, say, the US Treasury on the other side, whose job is to fund the U.S. government, which we know is spending a lot. So, how do we think about the interplay at a policy level between maybe a slightly less aggressive Fed and a more aggressive interventionist Treasury?

Rushabh Amin: I think a good starting point on this is where the Fed appears to be focused. We think that they're less focused on giving investors a road map as to where policy is going to go and are more focused on, as you mentioned, retaining that inflation-fighting credibility. So, in the past, we used to get very clear forward guidance. I think the new era has told us quite clearly that that is not what we should expect as investors going forward. At the same time, you have, as you mentioned, incredibly high deficits—I think estimated about 6.3% of GDP (gross domestic product) for 2026—even though the economy and LED market have been really strong. And there's no indication just yet that those deficits are expected to come down over the next couple of years. I think government debt in the U.S. just passed $40 trillion, which is about 123% of GDP, and it's expected to continue to rise. What we've seen as a result of this is the back end, or the longer-dated part of the Treasury curve, has acted like a release valve over the last 6 to 12 months. More recently, we've seen the Treasury come out and drive a bit more of an activist agenda. And this, in our view, can lead to a bit of an interplay or a bit of a tightening as to what the monetary side can do—that is, what the Fed can do. It may lead to a narrower path that they have to follow in order to maintain their inflation-fighting credibility. As we look forward, one of the things that we do believe now is that interplay of factors between the fiscal side and the monetary side, as these things ebb and flow over time, may prove to be a more important driver of asset prices and returns than anyone individually. So, we would like to focus less on, you know, where the next rate hike or rate cut is going to be and more on how these things are working together with each other and how are they really pricing into the Treasury curve, for example, or the bond markets as well.

George Bory: So, I think we framed it out. You know, we've got a lot of tension in the markets. We've got persistent inflation. So, let's dig into where does the rubber hit the road? The simple layup, if you will, is by inflation-protected securities. Things like TIPS (Treasury Inflation-Protected Securities), both in the U.S. and Europe and maybe from other countries around the world. Do TIPS play a big part in your strategy?

Rushabh Amin: TIPS do remain the most critical ingredient in a real return strategy. They provide a direct linkage to inflation and are often the first building block in these strategies. TIPS tend to outperform nominal Treasury bonds only if action inflation ends up being higher than the market’s breakeven expectations at the time of purchase. Therefore, there remains a challenge with TIPS on their own. That is, if inflation expectations are well anchored, the return that you may get from just owning the TIPS may not exceed that of the Treasury bond. So, what we like to do is combine TIPS with other asset classes, such as nominal Treasury bonds, such as credit markets, such as inflation-sensitive equity exposures, and also commodities, in order to pull together a diverse source of returns through all different types of inflation environments. So, TIPS are an ingredient, but not the entire recipe. Commodities are often cyclical and provide a kick when inflation is high, but they tend to give that back when inflation is low. So, what we like to do is combine different components, different asset markets together, blending top-down and bottom-up approaches to investing in order to drive strong, durable returns comfortably in excess of inflation over the long term.

George Bory: So, like one step deeper, if TIPS are going to provide you with some protection, but clearly of duration and adding commodities to the portfolio can also help, let’s think about across the other parts of say, the fixed income and debt markets and even on the equity side. As you mentioned before, right now, the AI build-out is estimated to cost at least $6 trillion. I'm seeing estimates starting to push closer to $10 trillion, which are government-level kind of spending plans, if you will, and huge repercussions from both lending and a borrowing perspective, but also an equity perspective. How are you guys thinking about credit and funding in an AI-driven economy?

Rushabh Amin: So, AI absolutely is an unavoidable factor in global markets, whether that's in the credit markets, whether that's in the equity markets and, actually to an extent, I would argue, also in the commodity markets today as well. You've mentioned the capex (capital expenditure) budgets, and we see the same. So, what we're really focused on, I'll start with credit, and then maybe we can move on to other pieces. We're focused on shorter-term-maturity bonds issued by companies rated triple B to single B. Some of these companies are related to the AI build-out, but many of them are not. So, we like to provide a bit of diversification in that kind of bond portfolio by having some exposure but not be exclusively exposed to AI-driven names. One of the key features of these bonds is they have higher yields and shorter maturities. They generate this attractive income of around 7%, which, even if you think about it today with elevated inflation, that's a real yield of nearly 5%, which is extremely attractive. Historically and today, 5% real yields are really, really attractive. So, we think this provides a bit of a cushion against price volatility in some of the longer-dated bonds or some of the higher-duration bonds that we may own in the portfolio. So, the message being, you know, be exposed to AI but not exclusively exposed to AI and use real yields to your advantage in the portfolio, as they have been really elevated relative to history.

George Bory: Well, protecting capital is one thing, but expanding purchasing power is really the mix of all of these factors, and sort of the diversification of opportunities are fantastic. There's a lot on the table, but setting the table correctly so that you can really create that nice stream of real, high-quality, real adjusted returns is fantastic. So let me ask you a couple rapid-fire questions. I appreciate your time. What’s been one of your biggest surprises in 2026? This has been an extraordinary year, like we have every year, but what stuck out in your mind in 2026?

Rushabh Amin: The one big thing that stuck out in my mind this year is just how resilient inflation expectations and, actually, growth have been despite all of the macro volatility. If we look back the last six months, we have seen a tremendous amount of cross-asset volatility, both in the markets and also in the data. And inflation expectations have remained fairly well anchored over that entire period, and that has been a real, real surprise.

George Bory: And then, second, is there maybe one of those subsectors, or even a subsector within the subsector, that you are watching closely?

Rushabh Amin: Industrial metals. This is a topic that is personally close to my heart. Industrial metals sit at the intersection of this AI build-out, electrification, changes of how utilities are working in the U.S., but also this long-term capital spending. And then there's a big question mark about the supply side on these metals as well. And in the short term they also remain influenced by growth expectations. So, industrial metals is the subsector that we're laser-focused on today.

George Bory: Which metals?

Rushabh Amin: Copper in particular is number one. If you take back five years, six years ago, the same facts were known—copper supply at the end of this decade is going to be really, really low relative to its expected demand. Copper mines take up to 10 years to really, really build out, and we haven't seen any progression on that. Prices have not yet, in our opinion, fully reflected what will be needed by a lot of these AI data centers, the electrification of the grid, and so on and so forth, just yet. So, copper's our number one, but substitutes of copper also come into play here.

George Bory: Got it. And then just lastly, you know, if you're trying to beat inflation, which is what a real return strategy attempts to do, what is your favorite indicator for inflation?

Rushabh Amin: My favorite indicator for inflation is actually our own, in-house inflation model that we've built. It combines inflation expectations and consumer and producer prices and crucially adds what we call a shock factor. So, it aims to try to tell us how much of a shock we are expected to feel in the economy over the next three to six months from some of these factors coming into play. It uses commonly known inflation indicators, such as the PCE, which is the Fed's preferred measure, but also some less-well-known measures to come into play as well, such as Truflation, ISM prices, and so on and so forth. So, our own model—I'm biased in that way.

George Bory: Rushabh, this has been a fantastic conversation—really timely considering what's going on in the world. But what's the one message you'd like the listeners to take away from today's conversation?

Rushabh Amin: So, real return investing requires a focus on inflation resilience as opposed to inflation hedging. I think that's a critical distinction and remains staying flexible. You want to have a diversification of return sources, both from the top-down macro allocations and from the bottom-up stock and bond selection.

George Bory: Rushabh, thank you so much. It really was a genuine pleasure to have this conversation with you today. Thank you.

Rushabh Amin: Thank you, George. It was great to be here.

George Bory: And to our audience, on behalf of everyone here at Allspring, we want to thank you for listening to today's SpringTalk podcast.