What Is the Best Inflation Hedge?

Chart of the Week: What Is the Best Inflation Hedge?

Inflation has been grabbing headlines for nearly two years. After a year like 2022, when inflation rates were at generational highs and stocks were dropping, investors weren’t sure about what defensive steps to take. 

Many had the same question: What is the best inflation hedge? 

It’s popularly assumed that commodities and gold, two asset classes that were up in 2022, are key portfolio tools to offset a rising cost of living. While commodities and gold do well during inflationary periods, I favor a different inflation hedge: Stocks.

You’ll rarely hear anyone bring stocks into the inflation-hedging conversation, yet stocks have risen just as much as gold (significantly more, if you count dividends) since the U.S. dropped the gold standard in 1971.

In the chart below, I show how stocks and gold stack up to the consumer price index (CPI) and the money supply, which is the total amount of cash, checking deposits and certificates of deposit (CDs) outstanding in the economy. (The money supply is one means by which economists gauge inflation’s impact.)

Since 1971, the money supply is up more than 3,000%. CPI, the more traditional measure of inflation, is up 600% over the same time. 

Investors have many options when it comes to protecting their wealth from rising prices—and it can make sense to do some mixing and matching in your portfolio. So what is the best inflation hedge? For most people, stocks are a great foundation for your inflation-hedging needs. If you have any questions about your strategy, please contact your wealth adviser.

This chart shows total returns for the S&P 500 (with and without dividends), CPI, gold and the M2 money supply from 1970 through January 2023. Stocks (with dividends) have outperformed significantly.
Note: Chart shows total return for each index/asset class from December 1970 through January 2023. Sources: Adviser, Bloomberg.

This material is distributed for informational purposes only. The ideas and opinions contained herein should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2023 Adviser Investments, LLC. All Rights Reserved.