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.

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