Best Investments During Inflation: Your Ultimate Guide

Inflation is a gauge of how quickly the price of goods and services increases over time. It affects many of our financial decisions, but to get the true impact of inflation, it’s important to understand how it’s measured.

There are a few key ways economists measure inflation:

1. Calculators: Economists use complex models to calculate how inflation changes year over year. These models consider the price changes of many products and services to provide an accurate representation of inflation.

2. Federal Reserve: The Federal Reserve plays a key role in monitoring and managing inflation in the United States. They use tools like interest rates and monetary policy to aim for an average inflation rate of 2% over time.

3. Consumer Price Index (CPI): The CPI tracks price changes for a “basket” of goods and services commonly purchased by consumers. It offers insights into inflation trends, guiding decisions from interest rates to government policies.

As inflation rises, money loses value, reducing the number of goods and services it can purchase. For example, let’s say you could buy 20 items on your grocery list with $100 a few months ago. Today, you might only be able to afford 12 things on the same grocery list due to higher prices. The same principle applies to your investment returns. This is why it may seem harder to save money during inflation.

If your investments aren’t inflation-resistant, the value of your portfolio will gradually decrease over time. To preserve the value of your investments, consider investing in inflation-proof assets that tend to perform well even in an unstable economy.

An inflation hedge is an investment that protects against the negative effects of inflation. In other words, these investments tend to do well even when inflation is high.

To maintain your portfolio’s purchasing power, consider inflation hedges like precious metals, commodities, and real estate to safeguard against a shrinking dollar. For example, if your portfolio only consists of Tesla and Google stocks, adding inflation hedges like gold – whose prices aren’t directly tied to the inflation rate – may be wise.

Need help figuring out where to park your money during an inflation surge? Here are some of the best inflation-proof investments to consider:

Gold

Gold tends to hold its value even during inflation. Why? Because the Fed can’t inject gold into the economy like they can with cash, which means gold’s value isn’t based on the central bank’s actions. Instead, gold’s value comes from its inherent scarcity and difficulty to mine.

Investing in gold can sometimes mean buying a physical block of gold and locking it away in your safe. But you can also invest in Gold exchange-traded funds (ETFs). Investors poured around $7.3 billion into SPDR Gold Shares (the largest gold-backed ETF by asset) in just three months to combat inflation.²

Real estate

Real estate is traditionally used as a reliable hedge against inflation since property and rental values tend to increase as the price of goods and services rises.

Because the demand for homes and apartment rentals tends to remain constant regardless of economic conditions, owning real estate could provide investors with a steady source of income.

Purchasing a property typically requires a substantial upfront investment and is most likely not an option if you’re on a tight budget. Don’t worry, though: You can still invest in the real estate market with real estate investment trusts (REITs). You can buy them through an online brokerage account by purchasing shares of publicly traded REIT stocks or mutual funds and ETFs that invest in REITs.

REITs operate portfolios of residential, commercial, and industrial properties and pay 90% of their taxable income to shareholders annually as dividends. And historically, they’ve outperformed the S&P 500 despite high inflation.³

Commodities

Besides precious metals, other commodities like agricultural goods and raw materials tend to perform well during inflation due to their inherent value.

Last year, Invesco DB Commodity Index Tracking Fund (DBC) — the largest broad basket commodity ETF by assets — rose nearly 18%, while the S&P 500 declined by approximately 20%.⁴ If your investment portfolio doesn’t yet include any commodities, consider adding some to diversify your investments.

Though commodities are typically considered inflation hedges, some prices are more volatile than others. For example, global oil prices inflated to over $110 a barrel due to supply concerns during the conflict between Ukraine and Russia. If you’re interested in investing in commodities, consider more stable ones like gold or base metals instead.

Floating-rate bonds

Floating-rate bonds (FRBs) have an interest rate that is adjusted based on a predetermined formula.⁵ In other words, if inflation increases, the interest rate on your FRBs also increases.

Because the interest rates on floating-rate bonds adjust according to the market conditions, FRBs can help you avoid market price volatility during inflation since there’s less opportunity cost. In layperson’s terms: Your FRBs’ returns will keep pace with the rising costs of goods and services, unlike traditional fixed-rate bonds.

Treasury Inflation-Protected Securities (TIPS)

Treasury inflation-protected securities are government-issued bonds designed explicitly to shield investors against inflation. The principal (face value) of TIPS adjusts with changes in inflation levels, ensuring that your investment keeps up with rising prices.

When TIPS mature, you receive either the adjusted principal or the original principal, whichever is higher. You can also indirectly invest in TIPS through ETFs, mutual funds, or short- or long-term bond funds.

Cash

While typically not an ideal long-term investment during high inflation, cash offers a unique advantage in uncertain times. Holding onto cash provides liquidity and flexibility, allowing you to capitalize on investment opportunities when market conditions are favorable.

That said, you should be cautious about holding too much cash, as the purchasing power of cash will decline over time. Instead, strike a balance between cash and other inflation-protected assets in your diversified portfolio.

You can also put your cash in a high-yield savings account to protect some of its value against inflation.

Cryptocurrency

Cryptocurrency, particularly Bitcoin and Ethereum, has gained a lot of attention as an alternative asset class during periods of inflation. Some view cryptocurrencies as a hedge against the devaluation of traditional fiat currencies. Cryptocurrencies are decentralized and not directly influenced by central banks or government policies, making them less susceptible to inflationary pressures.

Unlike other investments like bonds, crypto is highly volatile and speculative, which means it comes with significant risks. A lack of FDIC insurance means that cryptocurrency investments don’t offer the same level of protection as traditional bank deposits, like a certificate of deposit.

Understanding how inflation is measured is one step, but knowing how to profit from it is another. Let’s examine the advantages and disadvantages of inflation-focused investments and how they may fit into your personal finance plan.

Pros of inflation-focused investments

1. Preservation of purchasing power: Investing in assets that perform well during periods of high inflation can help preserve your purchasing power, ensuring your money maintains its value over time.
2. Diversification opportunities: Assets like real estate, commodities, and inflation-protected bonds (TIPS) tend to have low correlation with traditional investments like stocks and bonds, which can help reduce overall portfolio risk.
3. Income generation: Some inflation-focused investments, like dividend-paying stocks and real estate investment trusts (REITs), can offer regular income. This additional income can be especially valuable when the cost of living is rising quickly.

Cons of inflation-focused investments

1. Risk of loss: While some investments may perform well during periods of high inflation, there’s never a guarantee. Inflation-focused assets can be volatile, and their value may fluctuate, potentially leading to losses if not managed carefully.
2. Lack of liquidity: Some inflation-focused investments, like real estate, can be highly illiquid, making it difficult to sell them for cash when needed.
3. Lack of focus: Investing in inflation-focused assets can distract investors from their long-term financial goals. The urgency to safeguard against eroding purchasing power may lead to short-term gains and an overconcentration of inflation-resistant assets.

Investing wisely during periods of high inflation is a key aspect of personal finance. To navigate these challenging times, consider the following tips:

1. Diversify your portfolio: To shield your assets from the impact of inflation, diversify your portfolio across various asset classes. This diversification strategy ensures that if one sector faces volatility due to changing market conditions, your other investments can potentially compensate for any losses.
2. Understand your risk tolerance: For investors looking to make money in an inflationary environment, understanding your risk tolerance is crucial. For example, if you’re a risk-averse investor, investing in oil may not be the best idea.
3. Don’t panic: It’s easier said than done, but try your best not to panic about your investments during rising inflation. Making hasty decisions could lead to significant losses if you’re not careful. Before impulsively changing your investment strategy, understand what’s happening in the markets and consider talking to a financial advisor. They can help you make an informed decision about allocating your funds.

Remember to perform your due diligence before investing in inflation hedge assets like REITs and floating-rate bonds. Research each asset class thoroughly and seek expert advice from a certified financial advisor if needed. And if you aren’t quite sure where to start, read through our beginner’s guide to investing to get some ideas.

What is an inflation-proof investment?

An inflation-proof investment is an investment that tends to maintain its value during inflationary times by growing with or faster than the inflation rate. Investing in inflation-resistant assets could protect your portfolio against devaluation over time and retain its buying power.

What are the most inflation-proof investments?

Some common anti-inflation investments include gold, real estate, treasury inflation-protected securities, and floating-rate bonds.

However, it’s important to note that no asset class can offer 100% protection against devaluation – even among the assets mentioned above. You should always research the market and consult a financial advisor before making investment decisions.

What happens to stocks during inflation?

Inflation can have a profound effect on the stock market and stock prices. When inflation rises, the cost of raw materials increases – meaning businesses must pay more to produce their products. At the same time, consumers’ purchasing power decreases as wages do not keep up with rising prices, leading to less revenue for companies.

These two factors combined affect investor confidence and inject uncertainty into the stock market – causing fluctuations in stock prices.

Where not to invest during inflation?

During periods of high inflation, it’s generally best to avoid keeping too much money in low-interest savings accounts or holding onto cash, as the purchasing power of your funds may decline. Holding onto cash during inflation can result in a loss of real value over time, so it’s important to explore alternative investments that offer better protection against the eroding effects of rising prices.