How to Hedge Against High Inflation

With the governments of the world printing money to help free the money flow from the institutions to borrowers, there is a possibility of higher inflation when the economy decides to turn around.  What what kind of inflation will we be looking at?  Could we be facing hyper inflation with double digit interest rates?

How exactly would high inflation affect you and me?

  • Mortgages/Debt – People holding fixed rate debt have an advantage as they could possibly be paying interest less than the rate of inflation.  Higher inflation = Higher interest rates.  Variable Rate holders may want to consider locking in a fixed rate if increased inflation is evident.
  • The Savers – The opposite is true for savers (like myself), cash/spending power will decrease during times of high inflation.
  • Bonds – Bonds not indexed to inflation tend to do poorly during high inflationary times.  However, real return bonds are a different beast.  See below.

How to Hedge against High Inflation?

  • Real Return Bonds – Real return bonds pay their distributions adjusted for inflation.  You can see how these assets perform well during high inflation.  Check out the iShares ETF, XRB.
  • Invest in Assets/Equities – Minerals, hard assets, or equities that produce hard assets are another way to hedge against inflation.
  • Real Estate – Real estate has historically shown to be a great inflation hedge.  Don’t own real estate?  Perhaps REITs like REI.UN or XRE would provide a hedge as well.
  • Go fixed – As mentioned above, if you have variable rate debt, it may be in your best interest to lock into a fixed rate loan when increased inflation becomes apparent.  That way, variable rates can’t get into the range where the payments turn unaffordable.

What To Do?

As with any strategy, you can adjust to the current economic situation or stay put.  For most, it’s best to stay put with a balanced, risk adjusted, asset allocation.  As we can see from long term market returns during high inflationary times, equities still come out ahead.

For me, I’m going to wait and see.  The biggest risk I face right now is perhaps my variable rate mortgage and significant cash (to me) that I hold.  What are your plans if we face high inflation?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Staceyann C. Dolenti
10 years ago

Scott, I’m confused as to why you wouldn’t consider real estate as a hedge against inflation when you can rent properties and have someone else pay the mortage? Maybe you are referring to real estate investing as opposed to ownership?

Staceyann C. Dolenti

11 years ago

Wages do not keep pace with inflation. Wages are sticky and only negotiated periodically. Plus, wage increases are based on historical inflation whereas asset prices reflect anticipated inflation. Wages tend to lag behind the curve.

Stocks can do well in low, controlled inflationary environments. Mild inflation helps companies that can depreciate their liabilities, inflate their assets and raise prices.

Stocks don’t do well in high inflationary times. For one, consumer purchasing power falls (because wages can’t keep pace) and real consumption declines. Secondly, the inflation premium in discount rates used to value stocks become punishingly high, thus keeping stock prices low.

11 years ago

I’ve been doing some reading and research about precious metals (mainly silver) as an inflation hedge. Before I present my case, it must be understood that it is a silver vs. cash comparison in the face of inflation — holding silver instead of cash to preserve purchasing power.

(All calculations omitted for simplicity. Provided upon request. Bank of Canada calculators used.)

Years: % Change in the Value of Money per Annum*

1913 – 2009: silver +1.02%; cash -21.5%(!)
1950 – 2009: silver +1.08%; cash -3.85%
1970 – 2009: silver +2.46%; cash -4.54%
1990 – 2009: silver +3.01%; cash -2.05%

(*Average Annual Rate of Purchasing Power)

Any professionals out there agree with this? It looks to me that precious metals are a pretty safe, and established, hedge against inflation. Again, this is against cash holdings and for the sole purpose of preserving wealth and purchasing power.

I wouldn’t consider the stock market or real estate as inflation hedges.

12 years ago

When experiencing inflation hold/purchase anything that money buys and little money… In deflation hold lots of money and little else.. Inflation is a monetary phenomenon, too many dollars chasing too few goods. You can buy stock, house, gold…. Anything tangible.. It’s the poor folks with money in the bank living paycheck to paycheck who get decimated during inflationary times..

Silicon Prairie
12 years ago

The damage to savings may not be that bad, since rising interest rates will give them a better return. As long as the real interest rate is positive (and with the level of banking competition that’s still left it should be possible to find one) you aren’t losing anything.

I don’t like seeing interest rates go down now, but with prices of many things decreasing as well (at least temporarily due to sales) it’s not as bad as it looks either.

12 years ago

what about buying gold and silver? people seem to be losing faith in paper money.

12 years ago

How to hedge against high inflation? Easy, ABOLISH and outlaw central banks and return to the gold standard.

Google the “Austrian school of economics” and read Ludwig Von Mises’ articles. That’s the way to fix things.

12 years ago

Sarlock….relax my man. The sky is not falling. You are forgetting a couple key points.

1. There will be an oil crisis but not as you describe. The crisis will be that the industry as we know it will disappear. Not only has the supply of oil peaked (if you believe that) but also the demand for oil has peaked. The difference between the 2 charts is that the demand will diminish much much faster than the supply. Within 10 years you will not even be able to purchase a main stream vehicle that uses internal combustion. Even China has decided that it is going to an EV model. That leaves India and they will follow suit.

2. You assume that inflation will essentially ruin us. But the inflation that we are about to experience (which I feel will be more bark than bite) will also fix the ‘borrow-’til-we-drop train’ that you also reference. Low inflation/low interest rates simulate spending…..and high inflation/high interest rates simulate savings. No worries…it all works out in the end. We just need some balance.

The economy just needs a correction so that we can return to stability. Fear mongering and total pessimism can develop into a global self fulfilling prophecy….which is foolish. Nothing ‘real’ has changed in the world…no natural disasters, no new terrorism attacks, no food shortages, no new wars…nothing. Everything is just a figment of our imaginations….but unfortunately that is what our economy is based upon.

12 years ago

Inflation… strong inflation, in coming years. How soon? 2 years? 5 years?

Picture a world where each year your wages rise at only half the rate of inflation, your purchasing power declines year after year and your home continues to decline in value. Add to that an oil supply crisis that is just around the corner that will further stoke the inflation fires and we’re in for a real doozy of a coming decade. Toss out all of your old economic assumptions, spreadsheets and tables, kids, we’re entering an entirely new economic world here. We’ve been riding the cheap oil/borrow-’til-we-drop train for far too long.

12 years ago

@Mark…well…Iceland seems attractive seeing as how they’ve crumbled and are starting over from scratch (including a new government). They won’t have to sit through the hassle and prolonged agony of 2, 3, 5, 10(?) years of trying to ‘fix’ things, because their things have already crashed and burned completely.

My doubloons should be worth something over there!