Mounting inflation created lucrative opportunities for Wall Street’s biggest banks last year, a stark contrast to the millions of households struggling with climbing food and energy bills.

Lenders including Goldman Sachs Group Inc. and JPMorgan Chase & Co. made about $3.9 billion last year from inflation trading, a once-obscure business that deals in bonds and derivatives linked to consumer prices, according to data from Vali Analytics Ltd. in London. That’s almost double what the firms made in 2021 and compares with around $700 million before the Covid pandemic, the data show.

Goldman Sachs made at least $800 million on inflation trades last year, more than any of its rivals, according to people familiar with the matter. That was comfortably ahead of the $450 million the New York-based bank generated in 2021, according to the people, who asked not to be named discussing private information. 

The surge in inflation trading — long a niche business on Wall Street — has helped firms offset a slump in deal-making. The five biggest US investment banks — Goldman, JPMorgan, Citigroup Inc., Bank of America Corp. and Morgan Stanley — 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’ team includes London-based partner Nikhil Choraria, whose desk has focused in part on derivatives tied to short-term or “front-end” inflation and has profited by correctly predicting the direction of European prices, Bloomberg has previously reported.

Representatives for Goldman, JPMorgan, Citigroup, Bank of America and Morgan Stanley declined to comment on their earnings from inflation.

Interest rates were left at rock-bottom after the 2008 financial crisis, removing a key factor in inflation volatility and making this business a relative backwater for years. But 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.

“The reality is that client portfolios are still very exposed to inflation risk and they will need to consider that 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.”

Hedge funds are on the lookout for inflation traders who know how to navigate the industry, and the money can be significantly higher than at a traditional bank. But those who can extract maximum profits from smaller trading books will be the most desirable, said Jason Kennedy, chief executive officer of the recruitment firm Kennedy Group.

“Some are the best of the best because they have the bank’s balance sheet and they wouldn’t be able to do it at a hedge fund,” Kennedy said.

This article was provided by Bloomberg News.