Inflation rates that are high reduce your purchasing power, meaning your investments lose value. Inflation hedges perform better than the Consumer Price Index to keep your investment portfolio in good shape during inflationary periods.
Fine wine
Fine wine is a tangible asset that acts as a hedge against inflation. It delivers positive returns and consistently beats the Consumer Price Index.
The average annual inflation rate for the US in 2022 was 5%. The fine wine market experienced a 23% increase during the same time.
Fine wine is more profitable than inflation because it’s driven by internal factors such as supply and demand. It is, therefore, less vulnerable to inflation changes.
Inflation can make dividends like bonds less appealing. Wine investments, however, don’t pay any dividends, so they are unaffected. Instead, wine market inflation is combated by a demand-supply imbalance.
Only a small percentage of wines are suitable for investment. The demand side of fine wine is growing, with the demand only increasing as it reaches its peak.
Gold
Gold is another tangible asset. It can be used as an alternative investment to hedge against inflation. Because inflation rises, so does the price of gold.
In other words, if the dollar loses its value due to inflation, gold will likely become more expensive.
Gold is a valuable asset that investors consider a haven in difficult economic times. Many also view it as an alternative currency.
There are many ways to invest in gold.
- Buy gold coins and bullion. These don’t pay yields based upon an interest rate.
- Investing in an ETF or a gold mutual fund
- Buy stocks in gold mining companies
Commodities
A commodity is an item that can be reproduced, such as raw materials or agricultural products. It can also be sold. All commodities include oil, precious metals and grain.
Inflation and commodities have a special relationship. Inflation increases the cost of a commodity. This causes consumer prices to rise for those commodities.
As inflation increases the price of a commodity such as oil, other commodities like gasoline and petrol also see rising prices. A commodity can be used as an inflation hedge since its price rises with inflation.
There is an inflation risk when investing in commodities because they are susceptible to technological advancements or supply and demand factors.
If the supply of a commodity such as coal increases, its price will fall. As economies become more technologically advanced and shift to renewable energy, the demand will drop for coal, reducing consumer prices.
Real Estate
The Consumer Price Index increases real estate’s intrinsic worth, making it a “hard asset” that can benefit from inflation.
Inflation can lead to higher rents for landlords.
The mortgage allows you to buy a house and invest in real estate. This allows you to amortize your property at a fixed interest rate. In other words, inflation does not affect the amount that you pay.
There are many benefits to owning property. Your property can increase in value, and you can also make rental income from leasing your property.
You can also invest in REITs (Real Estate Investment Trusts) or in a mutual fund that invests in REITs.
Real Estate Investment Trusts pool capital from multiple investors to own income-producing properties such as commercial real estate.
Stocks
The stock market is volatile, but it offers good inflation protection long-term.
However, not all stocks are the same.
Inflationary times are a good time to search for stocks that have “pricing power”, which can be used to act as inflation hedges. Inflationary times can cause a company with pricing power to increase its prices, which will lead to a rise in its shares on the stock exchange.