The world’s largest sovereign wealth fund has warned that investors face years of low returns as the surge in inflation becomes a permanent feature of the global economy.

Nicolai Tangenchief executive of Norway’s $1.3tn oil fund, told the Financial Times he was “the team leader for team permanent” in the fierce debate over whether the jump in rates is transitory or a lasting threat.

Consumer price inflation is running at its highest level for more than two decades in the world’s big industrial economies, in particular in the US, where the annual pace of price growth hit 7 per cent in December, up from just 0.1 per cent in May 2020.

Tangen said the oil fundwhich owns the equivalent of 1.5 per cent of every listed company in the world, thought inflation “could be stronger than what is generally expected” as the world experiences both high demand and lingering disruption to supply chains.

“We are seeing it across the board, in more and more places. You saw Ikea increasing prices by 9 per cent, you have seen food prices going up, continued very high freight rates, trucking rates, metals, commodities, energy, gas . . . We’re seeing signs on wages as well.”

The former hedge fund manager said: “How will it pan out? It hits bonds and shares at the same time . . . for the next few years, it will hit both.”

Economists are divided over whether the surge in inflation is fleeting. Some argue the pandemic caused a temporary shock to supply chains that coincided with a sharp economic recovery, which will ease over time.

Market measures of inflation expectations suggest investors are not overly concerned about runaway inflation. One popular gauge, the ten-year break-even rate, shows inflation moderating from today’s levels to roughly 2.5 per cent. The two-year measure indicates inflation will remain just above 3 per cent in the near term.

But Tangen said other factors, including more people retiring or leaving their jobs, strengthened his view that the rises are permanent.

Both bonds and stocks started 2022 on the back foot, and investors’ longer-term expectations for mainstream capital markets are becoming gloomier.

AQR Capital Management, a quantitative investment group, estimates that a classic balanced portfolio of 60 per cent stocks and 40 per cent bonds will return just 2 per cent annually after inflation over the next five to 10 years. That is under half the roughly 5 per cent average enjoyed over the past century.

Large investors have sought to beef up returns with so-called “alternative” investment strategies, including hedge funds, venture capital and real estate. Their assets under management grew to $13.3tn last year, according to data provider Preqin, which predicts the alternative investment industry’s assets will grow to $23.2tn by the end of 2026.

The mandate of the oil fund, housed in Norway’s central bank, only includes stocks, bonds and real estate. It had its fourth-strongest year for returns last year, posting a 14.5 per cent increase. It has grown steadily since the global financial crisis in 2008, but Tangen warned that could be coming to an end.

“We will have much tougher times ahead . . . with extremely low interest rates and a very high stock market, and with increasing — and in some places accelerating — inflation, we could see a long period of time with low returns,” he said .

Historically the fund has “outperformed in up markets and underperformed in down markets”, he said. However, the former founder of London-based hedge fund AKO Capital, who took charge of the oil fund in September 2020, is aiming to change that through “a lot of smaller tweaks”, including employing forensic accountants to help find companies to underweight in its portfolio.

Additional reporting by Colby Smith in New York