Hedging Against Inflation

One of the realities of our economy is inflation. Inflation, which is a rise in prices (or a reduction in purchasing power) has a very real effect on your finances.  As inflation increases, your ability to get more for your money decreases.  This means that it takes more money to buy the same amount of product or service as you could buy a few years ago.  Unfortunately, there is almost no way to stop inflation.  Hedging against inflation, is something you can work on so that your wealth grows at pace with inflation — or beats it.

Playing It Safe: Capital Preservation

If you want to preserve your earning power by keeping pace with inflation, you can engage in a strategy known as capital preservation.  With this strategy, you try to encourage your asset growth to match inflation.  That way, your buying power remains intact, and you don’t take a lot of risks.

hedging against inflation

How do we go about hedging against inflation?

Some of the most popular vehicles for keeping pace with inflation are I-bonds and TIPS.  These are bond securities backed by the U.S. government.  They are adjusted to keep pace with inflation so that you earn interest at the inflation rate.  (We’ll leave whether or not CPI, which is used in adjustments, is a true measure of inflation for another time.)  You can also look for high-yield CDs, savings accounts and money market accounts that can sometimes keep pace with inflation and help you preserve capital while keeping your money safe in an FDIC-protected institution.

Riskier Opportunities: Stocks, Commodities and Currencies

Many people aren’t content to keep pace with inflation; they want to beat it.  In such cases, higher risk comes with the chance of higher reward.  Stocks represent one of the most common ways that people hedge against inflation.  Investors hope to earn enough money to help them live comfortably, even taking into account inflation.  Dividend stocks can provide you with a helpful way to beat inflation while cultivating an income stream.

Commodities and currencies are considered riskier investments, and they can do even more to hedge against inflation.  Indeed, gold is often seen as the hedge against inflation, since it often gains value as the dollar loses it (but not always).  Oil and other energy commodities are also considered good hedges against inflation.  Currencies other than the dollar can also be used to hedge against inflation.  However, before getting involved in such trading, it is important to understand the risks.

Taking Matters into Your Own Hands: Start a Business

Another way you can beat inflation is to improve your earning power.  You can start a business that grows along with inflation, helping you earn more even as prices rise.  There are a number of opportunities to make more money, thanks to technology and the Internet.  You can start a business to provide yourself with income through the years, or you can start one with the intention of selling.  Either way, there is the chance that you will be able to beat inflation with your own business.  However, you do have to understand that there are risks involved in starting a business as well.  You could lose everything if you aren’t careful.

In the end, there are many different strategies for hedging against inflation.  Figure out what combination is likely to work best for you.

Do you have any other suggestions for hedging against inflation?

Free Newsletter to Keep you Free From Broke!Name: Email: We respect your email privacyPowered by AWeber email marketing
Published or updated December 4, 2012.


  1. The entire time I was reading your article I was thinking how important it is to increase your income to hedge against inflation. Glad to see you mentioned starting a business at the end. The older I get the more convinced I am our financial well being is determined far more by our ability to generate big incomes than a buy and hold investment strategy.

    • I think generating more income is always a good thing. Creating a side business is a great learning process and could make you more marketable as well as make you more money.

  2. No Debt MBA says:

    We’re thinking about using dividend stocks as a hedge against inflation, particularly a few of the dividend aristocrats.

    • There are some stocks out there with generous dividends. For sure you have to understand the risks involved but you can certainly do better and increase your portfolio faster than inflation as well.

  3. I like to include real estate as one of my hedges against inflation. It may not beat it all the time, but the cash and wealth creation benefits are worth the investment.

  4. Similar to starting a business is buying income property. Your income grows along with inflation.

  5. Look at the long term; inflation never gets too far out of control, even if things get spookie in the short term.

  6. I also recommend having an emergency account set aside. This economy is unpredictable but it doesn’t mean your finances have to be! Live frugally and invest wisely. Great post.

  7. Good post with many good points!

    Having arrived at the age where I need (but given the economic predicament cannot draw on) my retirement savings, my question is not so much how can we hedge against inflation but how can we protect ourselves against out-and-out economic catastrophe. Right now, inflation looks like the least of our problems.

    High-yield CDs and savings accounts, BTW, do not keep up with inflation. Remember, our doughty leaders have been telling is there is no inflation, as the prices of fuel and food — the very things we can’t do without! — spiral upward. I have a friend who indeed did put his money in high-yield CDs. He’s very worried about the future, because the returns are not keeping up with the increase in his (very conservative) cost of living.

    I have two businesses and a part-time job that partially support me in my present dotage. Let me tell you: these piddly little underpaid gigs will not pay the bills in retirement — and in times like ours, “retirement” is not a choice; it’s the result of layoffs at an age where people can’t get rehired in the job field where they have experience and have earned a decent wage. Without Social Security, I would be living in the street today.

    Trying to juggle three demanding if poorly paying enterprises in your old age is freaking exhausting. It’s MUCH more work and much harder work than holding down a 40- to 60-hour-a-week job. About two weeks ago, I raised my head from the computer about 10 p.m. and realized I’d been working twenty hours straight without a break. Because I’m relatively young as old bats go, I’m holding my own (just barely). But I can’t continue to do this many more years.

    I had hoped the economy (and my investments) would recover by the time I could no longer keep working like a donkey, so that when that time comes I would be able to sell investments to replace the cash coming in from the ridiculous work schedule. But given the events we’ve seen over the past few weeks, it’s clear that’s not going to happen.

    As a person in your 20s or early 30s, you have one, count it, one strategy to secure a reasonably safe and secure retirement, and that is to live like an anchorite from the time you begin working to the time your career superannuates you into oblivion, and during that productive period to save and invest every penny you can while paying off the roof over your head and avoiding all other kinds of debt. You’re looking at 40-plus years of “needs-only” budgets, obsessive saving, smart investing, and mortgage payoff.

  8. Debbie M says:

    I’m too poor to invest in much real estate–I bought my house, though, and I have REITs. (Property taxes and insurance still go up with inflation.)

    Another strategy is to invest in permanent things that allow you to stop buying throw-away things. For example, if you use cloth napkins, you don’t have to worry about the inflation rate of paper napkins.

    Another strategy is to learn more skills so that you can do more things yourself if you have to. The obvious one is to do more of your own cooking when times get hard. But you could learn to do other things that most people pay others to do like maintain your car and cut hair or things that keep you from throwing things away like sewing buttons back on. Just pick the most fun sounding things. Then you won’t have to worry about the inflation rate for those services.

  9. I second (or third?) the idea of rental properties. Please don’t be a slum-lord, please put up a sizable down payment (you have to now anyway to get a loan), please do your homework and realize that it’s not for everybody – although it’s really a myth that you’re going to get a call in the middle of the night to fix a toilet, and above all, please screen your tenants well. If you treat it like the serious business it is and not something to just blindly jump into, rental properties are the ultimate hedge against inflation. My husband and I currently have two and are in the process of purchasing our third, and it’s gone very well so far. Screen your tenants well!

  10. terry thometz says:

    This is a stack of lies masquerading as half-truths.

  11. have you looked into property management? Its like 10% cost, but they do just about everything for you. If you can cover that expense, its well worth it if you plan on owning more properties

  12. Some bonds that pay a interest yield + inflation adjusted yield are one option to at least ‘perform’ the inflation rate + cash rate. You also need to ensure the bond is high investment grade.

  13. No dubt: generating more income is always a good thing

What Do You Think?