Best Historic Inflation Hedges

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Posted: Aug 23, 2021 10:00 AM
Best Historic Inflation Hedges

Source: AP Photo/Jae C. Hong

We've been arguing that America has likely already entered a period of elevated inflation.

If this outlook is correct, investors would be wise to investigate which investments act as inflation hedges. Here’s how Investopedia describes inflation hedges:

“An inflation hedge is an investment that is considered to protect the decreased purchasing power of a currency that results from the loss of its value due to rising prices either macro-economically or due to inflation. It typically involves investing in an asset that is expected to maintain or increase its value over a specified period of time. Alternatively, the hedge could involve taking a higher position in assets, which may decrease in value less rapidly than the value of the currency.”

Recently, economist Dr. Mark Skousen wrote an analysis about inflation hedges, in which he summarized data from Wells Fargo looking at various investment options and their comparative returns during times of high inflation.

(Source: "What’s the Best Inflation Hedge? Surprise, Surprise — It’s Not Gold or Bitcoin!" by Mark Skousen, 7-1-21, finance.townhall.com)

Unfortunately, the Wells Fargo analysis did not appear to include real estate among the asset classes, which is a serious omission given the commonsense arguments for real estate as an inflation hedge. Skousen sums up those arguments below:

“Rental properties and single-family homes can hedge, and even profit, from inflation in three ways:

 1). Real estate prices can appreciate.
 2) Income from rent grows with the Consumer Price Index (CPI).
 3) “Depreciating debt” occurs, whereby the value of the real estate holder’s mortgage payments depreciates.”

So, per the analysis above: commodities have historically been good inflation hedges in general, as have stocks; emerging market stocks generally perform better than other stocks, and stocks better than bonds (with the exception of TIPS, which are a kind of bond which offers special protection against inflation, so you'd expect them to do relatively well under times of high inflation.)

We'll present our own internal analysis of inflation hedges, including real estate, in a future installment of this series.