Inflation Trades Reach Record High of $4 Billion on Wall Street in 2022

As inflation rose last year, Wall Street's biggest banks saw opportunities for profit, while many households struggled to keep up with rising food and energy costs.

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According to data from Vali Analytics Ltd. in London, lenders including Goldman Sachs Group Inc. and JPMorgan Chase & Co. made almost double what they made in 2021 from inflation trading last year, with around $3.9 billion in profits. This once-obscure business deals in bonds and derivatives linked to consumer prices, and the pandemic has caused a significant increase in profits, with around $700 million made before the Covid pandemic.

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The 15 largest banks saw profits of $3.9 billion last year as prices rose. Goldman Sachs generated more than $800 million in profits from inflation trades last year, easily outpacing its rivals, according to people familiar with the matter. This is significantly higher than the $450 million the bank generated in 2021, according to the people, who asked not to be named discussing private information.

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The surge in inflation trading has helped offset a slump in deal-making on Wall Street. The five biggest US investment banks boosted fixed-income trading revenue by 28% to $13.3 billion in the fourth quarter of 2022, while fees from advising on mergers and acquisitions and managing stock and bond sales tumbled 53% to $6.3 billion.
Goldman Sachs has a team of experienced professionals who know how to make money by correctly predicting the direction of European prices. One of these experts is Nikhil Choraria, who is based in London. Choraria has focused on derivatives tied to short-term or "front-end" inflation, and he has been very successful in his predictions.

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The representatives for Goldman, JPMorgan, Citigroup, Bank of America and Morgan Stanley all declined to comment on their earnings from inflation.
Interest rates have remained at rock-bottom levels since the 2008 financial crisis, which has helped to stabilize inflation and made this business a relative backwater for years. However, the invasion of Ukraine, supply chain problems and rising energy costs have driven up prices at the quickest pace in decades, creating cost-of-living crises across many parts of the globe. Questions over whether inflation has peaked and what that means for central banks' next steps continue to stir markets.

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"Inflation risk is still a major concern for investors, and it's something that they will need to take into account more," said Lindsay Politi, who trades inflation at Connecticut-based One River Asset Management LLC. "The inflation we're experiencing is pretty structural and I don't think it will fall back into the range of the 2010s before the pandemic."

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Investors are looking to protect themselves from - and profit from - the historic rise in prices.
Hedge funds are always searching for inflation traders who are familiar with the industry, and they are willing to pay these individuals significantly more than what traditional banks offer. However, the most desirable candidates are those who are able to generate the highest profits from smaller trading books, according to Jason Kennedy, chief executive officer of the recruitment firm Kennedy Group.

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"Some investment bankers are the best of the best because they have access to the bank's balance sheet. This gives them an advantage that they wouldn't have at a hedge fund," Kennedy said.