The Best Investments To Hedge Against Inflation

With inflation recently reaching its highest level in decades, protecting Inflation your money from inflated prices eroding its purchasing power becomes crucial. Especially for investors with long-term horizons, countering inflation’s effects could make an enormous difference in retirement lifestyles down the road.

Thankfully, certain business investment asset classes tend to provide strong inflationary hedges – either through direct linkage to consumer price increases or innate structural advantages.

How Inflation Eats Away at Cash

Inflation refers to the gradually rising price of goods and services in an economy over time. As prices increase across the board, static cash savings decline in relative real value – reducing how much you can purchase with the same dollars.

Impact of Compounding

While modest 3-5% annual inflation may seem harmless initially, compounded over years, the impact grows exponentially. Consider that goods costing $100 today will soar in price to over $180 in just 10 years at a 5% annual inflation rate!

Clearly, anyone holding cash savings like T-bills or money markets over longer terms gets crushed by declining purchasing power. So what assets actually provide inflation protection?

  1. Inflation-Indexed Bonds

Built-In Rising Payouts

Inflation-indexed bonds (IIBs) essentially contain derivatives allowing the principal amounts to increase alongside inflation. Bonds with this inherent advantage include U.S. Series I Savings Bonds and Treasury Inflation-Protected Securities (TIPS).

As official inflation metrics like Consumer Price Index (CPI) rise signaling reduced purchasing power of money, indexed bond face values also proportionally rise. This adjusts the fixed interest payments higher, enabling income levels to largely keep pace.

While returns may slightly lag stocks long term, IIBs provide reliable fixed income largely keeping up with rising costs. This helps conservative investors worried about inflation guard nest eggs.

  1. Commodities

Hard Asset Advantage

Whether precious metals like gold and silver or industrial/agriculture commodities like oil and corn, raw materials closely correlate to consumer prices especially during inflation. After all higher product input costs directly translate to customers paying more.

Additionally, unlike financial assets with just notional value, commodities benefit from tangible intrinsic worth – giving confidence to investors during market turmoil. This helps diversify against inflation compared to just stock/bond holdings.

  1. Real Estate

Similar to commodities, real estate carries intrinsic use and space value unaffected by price fluctuations making it popular for hedging inflation. Property values and rents also generally rise during periods of marked inflation compared to other assets, especially in growing areas.

REITs Offer Liquidity

While owning physical housing entails management responsibilities, real estate investment trusts (REITs) provide convenient liquid exposure to commercial/residential real estate markets.

REITs often feature dividend yields superior to bonds also making them attractive inflation-protecting income generation tools. Just ensure inflation adjusted rates still deliver adequate real cash flow.

  1. Stocks

Broadly speaking, public company earnings often rise during inflation thanks to them passing higher input costs to customers over time. Stocks also benefit from a psychological perspective simply because equities represent claims on real assets and future cash flows.

However, higher inflation also frequently spurs central banks to hike interest rates hampering economic growth. So some market volatility should be expected. Focus on companies with sufficient pricing power and avoid interest rate sensitive sectors when inflation spikes.

  1. Alternative Investments

While 1986 rock band REM first termed it “life’s rich pageant” modern investors now use the term to signify eclectic assets outside standard stocks and bonds. This includes non-publicly traded assets like private equity, hedge funds, venture capital, currencies, fine art, and more.

Alteratives represented over $13 trillion investments in 2020 with particular appeal today for portfolio diversification and inflation-resistant properties. However, minimums often run high while liquidity proves lower than traditional investments. Consider including alternatives like managed futures or MLPs for amplified diversification from plain vanilla stock and bond holdings alone if suitable.


Rather than attempting to time markets or drastically overhaul portfolios, gradually incorporating targeted inflation-fighting components allows insulating portfolios for the long run. Discuss with a financial advisor to gauge suitability of specific anti-inflation assets for your individual situation and risk parameters.

The price outlook remains uncertain, but ensuring your investment portfolio stays ahead of the general price curve remains well within your control.

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