How to hedge against inflation & prepare for future hikes

While inflation has cooled since 2022, it remains elevated, and the Federal Reserve may need to continue raising interest rates to lower it. With your investment plan in mind, you could consider certain inflation hedges to get you through these times. These are assets that could help you offset the effects of higher prices and future interest rate hikes without putting your goals on hold. Let's review some common inflation hedges—and some assets to avoid—so you can forge ahead during inflationary periods.

While there's no single best way to hedge against inflation, several assets tend to perform better than others during inflationary periods. Though positive performance isn't guaranteed, these assets may help to offset the negative effects of inflation and provide some stability:

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

Treasury inflation-protected securities, or TIPS, are bonds that adjust with inflation. The bond principal matches any changes in the Consumer Price Index, leading to larger interest payments when inflation rises. You can use TIPs as an inflation hedge by investing in individual TIPS bonds, or you can buy a basket of TIPS held in a mutual fund.

Series I bonds also offer inflation protection, as they're a fixed-income security that earns interest based on inflation. The interest rate is set twice per year, and interest is compounded semi-annually. The interest rate for I bonds issued from May 2023 through October 2023 is 4.30%. You can buy I bonds directly from the Treasury, and they're limited to $10,000 per person per calendar year.

A floating rate bond is a variable rate security that allows you to earn a higher annual interest rate as interest rates rise. Since interest rates typically rise during high inflation, these securities act as good inflation hedges. However, some floating rate bonds carry a risk of default and can decline in value when interest rates fall.

Commodities help to hedge against inflation because commodity prices generally rise during inflationary periods. Commodities are raw materials—such as oil, natural gas, precious metals and grains—that are used to make other products. In particular, using gold as an inflation hedge has a mixed history of performance. But it has historically offered a reliable store of value, acting as a means to diversify your portfolio. This is especially true during times of uncertainty when demand for gold often increases.

Since it's difficult to directly own commodities in large quantities, you can gain indirect exposure through derivatives like futures or options. Or you can gain indirect, diversified exposure to commodities through mutual funds or exchange-traded funds (ETFs), which are like mutual funds but trade like stocks.

Real estate is generally considered an inflation hedge because property prices tend to rise with inflation. If you're a homeowner with a fixed-rate mortgage, you get to own an appreciating asset at a fixed cost for debt. Investing in real estate can have a similar benefit, as it may be natural to raise rent as inflation rises.

If you want to gain access to real estate without buying physical property, you might consider real estate investment trusts (REITs). 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 can make decent inflation hedges, especially when you embrace a long-term holding strategy. Equities have historically produced higher average returns over time compared to average rates of inflation. The average historical return for stocks is about 10%, while inflation has averaged about 3.2% over time.

So, 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, rising costs and inflation can harm companies' profits, and stock prices can fall.

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How to cope with inflation—emotionally & financially

Although inflation has cooled from its 40-year high in 2022, the rate of inflation in 2023 remains above average. Even if you feel some effects on your wallet, it's good to remember that inflation is a normal part of the economic cycle. And, as historical inflation trends suggest, there's reason to look for better days ahead.

Dive deeper

Outside of the traditional inflation hedges, you could tap into other financial products that could offset the effects of rising prices and higher interest rates.

Some annuities, such as indexed and variable annuities, can offer protection against inflation. These are insurance products that could set you up for a guaranteed income stream in retirement. Some contracts come with inflation-adjusted annuity payments, offering an additional safeguard in uncertain times.

Some life insurance contracts offer inflation protection to ongoing benefits, which may adjust upward with inflation. Permanent insurance contracts, such as whole life or universal life, have cash components that can provide growth over time. Some contracts have flexible premium payments, which can be helpful when the prices for many goods and services are rising.

You'll want to protect your portfolio against inflation with the right assets, while also reducing or eliminating exposure to assets that inflation could negatively impact:

Bond prices generally move in the opposite direction of interest rates, and longer maturities tend to be more sensitive to these changes. When interest rates rise, prices for long-term bonds may generally decline more than short-term bonds.

Since interest rates for certificates of deposit (CDs) typically rise during high inflation, it can be wise to delay buying long-term CDs, which generally have terms between two and five years. 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 and savings accounts can offer stability, and money market accounts may offer high yields. But they typically have lower interest rates than the rate of inflation. Returns after taxes and inflation also can be negative. So, be strategic about using these accounts, and review how they fit with your overall investment portfolio objectives and liquidity needs.

The economy's ups and downs are a natural factor in any financial plan, but you can protect your money against inflation with some preparation. While there are some tried-and-true tactics, hedging against inflation means determining which strategies and financial solutions work best for your goals.

Inflation doesn't have to rock your vision for your family's financial well-being. A local Thrivent financial advisor can help you make sound decisions during life's trickier times and tailor solutions that keep your plan on track.