Best Assets to Hedge Inflation

After years of low inflation readings well below 2%, expect to see higher inflation through the rest of the year possibly longer. Inflation typically rises during periods of economic growth, so it’s no surprise inflation expectations are rising at a time that consumers are in a great position to start spending.

The combination of savings and the supply side shock from the pandemic shutdown is causing upward pricing pressure on goods and services. In fact, the personal savings rates for U.S. consumers jumped to 20.5% in January 2021. That’s a lot of extra cash that they will likely get spent on various goods and services.

Meanwhile, the U.S. government just issued $1.9 trillion in additional stimulus which will create more demand for less services currently in the economy. Think of inflation as having to pay more for a show or concert because it was already sold out.

Here are 3 assets classes to consider as a hedge against inflationary times.

Equities

Equities are valued based on a company’s revenue, earnings and cash-flow growth and companies whose business models may be linked to sectors of the economy that benefit from inflation or are the source of inflation tend to fare better than those with the exact opposite type of business structure.

Equities in themselves tend to keep a better pace with inflation than other investments like fixed-income investments. Companies that benefit from higher inflation are those that are able to pass along higher prices.

Not all equities are the same and act the same in inflationary periods so do your homework and understand what you are buying, why and with proper entry and exit points for the positions. Remember, inflation can mean interest rates might rise which can put pressure on some stocks or the overall market itself.

Commodities

Commodities are not the only source of inflation, but they are an important driver of it. This relationship automatically makes commodities an effective hedge against inflation.

Thus, commodities hedge inflation well in general. The higher the level of inflation, the more effective it becomes. Furthermore, it hedges particularly well when inflation is driven by food and energy prices which are both a key force of inflationary shocks. The recovery from the Covid-19 pandemic and an expected weakening of the US dollar would serve as stimulus for overall commodity prices.

You can get exposure to commodities through the companies that make commodities their business or through the commodity itself. Trading commodities on the futures market carries significant risk and you should always understand the risk of the position and make sure it aligns with your risk tolerance. Things can move fast when you introduce leverage.

Real estate

Like commodities, different ways to gain real estate exposure, either direct through the asset or indirectly in vehicles like REIT’s. As inflation refers to a decrease in your buying power, an inflation hedge, in investing, protects you from it.

An inflation hedge typically involves investing in an asset expected to maintain or increase its value over a specified period of time. That’s why real estate is considered a hedge against inflation, since home values and rents typically increase during times of inflation. Property prices and rental income tend to rise when inflation rises. A REIT consists of a pool of real estate that pays out dividends to its investors. Real estate income is income earned from renting out a property.

Real estate works well with inflation, as inflation rises, so do property values, and so does the amount a landlord can charge for rent, earning higher rental income over time. This helps to keep pace with the rise in inflation.

Even with Inflation, the End Goal Remains the Same. The primary goal of investing is growing your assets at a rate greater than inflation without taking undue risk. This doesn’t change. While there are a number of factors contributing to rising inflation, the risk of runaway inflation is very low. The information in this article is for educational purposes only and is in no way any financial advice or recommendations to purchase any assets mentioned within.