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How to hedge against inflation and prepare for future hikes

Shopkeeper doing his monthly financial planning and bookkeeping
Trevor Williams/Getty Images

With inflation at 40-year highs, the cost of almost everything is more expensive. Meanwhile, the Federal Reserve is raising interest rates in an attempt to cool the economy and bring down inflation. This environment can be challenging for savers and investors, to say the least.

With your family's financial health in mind, you may be looking for ways to offset the current effects of inflation and hedge against future price hikes. You're not alone. Here's a look at how to hedge against inflation using assets that can offset the negative impacts of higher consumer costs, rising rates and a slowing economy.

Assets that may help hedge against inflation

While there's no single best way to hedge against inflation, several assets have historically tended to perform better than others during inflationary periods. During times of volatility, these assets can potentially provide more stability. Past and positive performance is never a guarantee with investing, but these assets may help to offset the negative effects of inflation:

  • Treasury inflation-protected securities (TIPS)
  • Series I savings bonds
  • Floating rate bonds
  • Commodities
  • Real estate
  • Stocks
  • Gold

Treasury inflation-protected securities (TIPS)

Treasury inflation-protected securities, or TIPS, are bonds that are indexed to inflation, as measured by the Consumer Price Index (CPI). Bond principal amounts are adjusted to match changes in the CPI which results in larger interest payments during periods of rising inflation. You can invest in TIPS by purchasing individual bonds, or you can choose to buy a basket of TIPS held in a mutual fund.

Series I savings bonds

A Series I savings bond is a fixed-income security that earns interest based on inflation. The interest rate is set twice per year and interest is compounded semi-annually. On July 1, 2022, the I bond interest rate was set for 9.62% through Dec. 31, 2022. You can buy I bonds directly from the Treasury and they're limited to $10,000 per person per calendar year.

Floating rate bonds

A floating rate bond is a variable rate security that allows an investor to earn a higher coupon payment, or a higher annual interest rate, as interest rates rise. Since interest rates typically rise during periods of high inflation, floating rate bonds can be good inflation hedges. However, keep in mind that some floating rate bonds carry risk of default and can also decline in value when interest rates begin to fall again.

Commodities

As commodity prices generally rise during inflationary periods, they can be a good inflation hedge. Commodities are raw materials—such as oil, natural gas, precious metals and grains—that are used to make other products.

Since it's not easy to take direct ownership of commodities in large quantities, you can gain indirect exposure through derivatives like futures or options. Or you can gain indirect exposure to commodities through mutual funds or through exchange-traded funds (ETFs), which are like mutual funds but trade like stocks.

Real estate

Real estate is generally considered a good inflation hedge because prices for real property tend to rise along with inflation. For a homeowner that has a fixed-rate mortgage, they get to own an appreciating asset at a fixed cost for debt. Real estate investors may have a similar benefit, plus they may be able to raise rents as inflation heats up.

If you want to gain access to real estate without buying physical property, real estate investment trusts (REITs) may be an alternative. Instead of buying, owning and managing real estate, you can invest in a REIT, which is a company that owns income-producing real estate properties.

Stocks

Stocks can make good inflation hedges, especially as long-term holdings. This is because equities have historically produced higher average returns over time compared to average rates of inflation.1 The average historical return for stocks is about 10%, while inflation has averaged about 3.2% over time.

Therefore, based on history, an investment in stocks could generally grow faster than the rate of inflation over long periods of time, such as 10 years or more. In shorter timeframes, however, stocks of companies whose profits are impacted by rising costs and inflation could experience price weakness.

Gold

Gold is a traditional inflation hedge, although its recent history is inconsistent in this regard. Because gold has historically offered a reliable store of value, the precious metal remains a good diversification tool.2 This is especially true during times of uncertainty when demand for gold often increases.

Some investors buy gold directly with bullion bars, gold coins or jewelry. Other investors invest in gold indirectly with mutual funds that invest in mining companies or ETFs that track the price of gold.

Bank accounts and insurance products as inflation hedges

While it can be smart to invest in traditional inflation hedges such as stocks, real estate or commodities, other financial products can help offset the effects of rising prices and higher interest rates:

  • Annuities. Some annuities, such as indexed annuities and variable annuities, can offer protection against inflation.
  • Life insurance. Some life insurance contracts offer inflation protection to ongoing benefits, which may be adjusted upward with inflation.3 Permanent insurance contracts, such as whole life or universal life, have cash components that can provide growth over time. This is in addition to the product's flexible premium payments, which can be helpful when the prices for many goods and services are rising.

Assets that inflation can negatively impact

Protecting your portfolio against inflation with the right assets is a good idea, but it's also wise to reduce or eliminate exposure to assets that inflation can negatively impact. Because interest rates often rise during inflationary environments, certain assets can negatively impact your investment portfolio and savings, as your money is tied up for a lengthy amount of time:

  • Long-term bonds. The prices for bonds generally move in the opposite direction of interest rates and longer maturities tend to be more sensitive to these changes. Therefore, when interest rates are rising, prices for long-term bonds may generally decline more than short-term bonds.
  • Long-term CDs. Since interest rates for CDs typically rise during high inflation, it can be wise to temporarily delay buying long-term CDs, which generally have terms between two and five years. This is because you don't want to lock in a lower rate today when you could potentially get a higher rate in the near future.
  • Cash, checking, savings and money market accounts. Although these types of investment accounts provide stability and liquidity, they typically generate interest that is much lower than the rate of inflation. Thus, returns after taxes and inflation can be negative, so be strategic about using these types of investments and ensure they fit with your overall investment portfolio objectives and liquidity needs.

Finding the right strategies for your situation

Learning how to hedge against inflation means determining which strategies and financial solutions work best for you. Some investments and other financial products can be complex. To find the right plan that works for you and your household, consider working with a local Thrivent financial advisor who can confirm you're doing what you can to protect your savings.

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1Past performance is not necessarily indicative of future results.

2While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.

3If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance, may be solicited.

Certificate of Deposit: Investing in securities involves risks such as fluctuating principal, and they may lose value. CDs offer a fixed rate of return. The value of a CD is guaranteed up to $250,000 per depositor, per insured institution, by the Federal Deposit Insurance Corp. (FDIC), an independent agency of the United States government.

Refer to the Thrivent Investment Management Inc. Form CRS Relationship Summary for more information about us; our relationships and services; fees, costs, conflicts, and standard of conduct; disciplinary history; and additional information. Refer to the Thrivent Investment Management Inc. Regulation Best Interest Disclosure document for information on fees, products, services, potential conflicts of interest, and additional information. Both are available upon request from your financial advisor or professional and on thrivent.com/disclosures.
4.12.18