What to Do When Inflation Is High?

Rising inflation is among of the biggest concerns for investors today. In February, US inflation rose to 7.9 percent, marking a 40-year high.
At these rates, returns can be eaten up or even outpaced by rising prices quite speedily. This situation has left investors scrambling to find safe havens for their capital in the new inflationary world. The question what to do when inflation is high has some tried and tested answer, though. 

The Key to Navigating Inflation: Own Physical Things

Perhaps the most common-sense piece of advice for navigating inflation comes from Elon Musk: Own physical things.
Physical assets and stocks in companies that make physical goods tend to hold their value when inflation is heating up. These assets weather inflation much more easily than non-physical assets and stocks in less essential companies.
When inflation runs high, consumers tend to focus on the most necessary goods and services while cutting spending elsewhere. Discretionary spending will likely pull back as Americans continue to feel the bite of the highest inflation in decades. As a result, focusing your investments on housing, essential services and basic goods is a strong strategy for protecting your portfolio.
Drawing on this sensible advice, there are several classes of assets that leap out as good options for riding out periods of higher inflation. Below, you’ll find some of the top investments to consider making until inflation begins to cool down.


One of the most useful tools for capital preservation during times of high inflation is the Treasury Inflation-Protected Security (TIPS).
These securities are indexed to the rate of inflation. As inflation rises, the principal value of a TIPS rises in accordance with it. This makes the TIPS arguably the surest and safest way to combat inflation in your portfolio.
Although TIPS securities obviously have considerable advantages when inflation is high, it’s important to understand that they also have certain downsides.
In the absence of significant inflation, TIPS notes lose a significant portion of their appeal and tie up capital that could otherwise find higher returns elsewhere. The maturity dates for TIPS also range between 5 and 30 years, making them a long-term investment for those who plan to hold them to full maturity.

Assets (Art, Collectibles, etc.)

Physical assets that don’t fall into the category of traditional investments can also be useful to own when inflation is running amok.
Art investment, for instance, historically outpaces inflation by a considerable amount. It also gives investors a tangible, physical asset that is much more immediately understandable than traditional securities. Collectibles work in much the same way.
Like many inflation-hedged assets, art and collectibles should be thought of as part of a broader strategy to head off rising prices. While they can hold their value quite well, demand cycles among collectors make it difficult to accurately predict price movements.
Using these assets in conjunction with other, more traditional investments, however, can prove very effective when inflation is rising.

Short-term Bonds

Due to their low yields, bonds typically aren’t considered good assets for handling inflation. Short-term bonds do have an advantage over their longer-term cousins, though, because they are less affected by rising interest rates.
Interest rate hikes always have a negative effect on the price of bonds, but short-term bonds don’t suffer quite as badly.
It is important to recognize, though, that short-term bond yields likely won’t keep pace with inflation when it is running above average.
The yields on these bonds are quite low, making it easy for them to be eaten away by inflation. For this reason, short-term bonds should be thought of as a way to keep some capital somewhat liquid while earning a bit of interest on it, rather than as a means to outpace inflation.


Because of their generally higher rates of return, stocks are usually a good option when inflation is running high.
Returns in the stock market typically outpace all but the worst inflation and beat out average inflation by considerable amounts over time. If you’re investing in a high-inflation environment, though, it’s crucial to put a bit of thought into buying the right assets.
The simplest way to invest when inflation is high is to buy an index fund. These funds track broad stock indices, providing you with automatic diversification and reducing your exposure to any one stock.
Historically, the S&P 500 index is one of the best assets to hold long-term. This index returns an annual average of about 10.5 percent. The long-term historical average inflation rate, for comparison, is just 3.25 percent.
You can also consider investing in individual stocks that tend to ride out inflation well. Some of the most inflation-resistant types of stocks are energy, healthcare and utilities. Companies in these industries supply essential goods and services that will see stable demand, even if consumers cut spending elsewhere.

Real Estate

Owning physical real estate is one of the best ways to beat inflation while still generating regular income from your investments.
Real estate prices typically have a low correlation to stock and bond prices, allowing investors to put their capital to work with less risk from inflationary pressures. Because home prices tend to rise along with inflation, the value of the asset tends to increase during these periods.
Investors who finance their real estate see especially large advantages. As prices rise, the value to debt ratio on a property rises along with it. Thanks to this phenomenon, investors see higher returns on borrowed money. If rents increase as well, it also becomes easier to pay off the debts and pocket a profit at the same time.


Historically, gold has been a go-to asset for investors trying to guard against inflation. While its price does vary over the short term, gold has proven to be an effective long-term hedge against inflationary pressure. Over time, the precious metal holds its purchasing power, even when currencies are rapidly losing value.
Because of its lack of actual return or cash flow, gold isn’t an investment that makes sense for growing the value of your portfolio over time. Where it does make sense, though, is as part of an inflation-hedged component of your portfolio.
Along with other assets that are protected from inflation, gold can give you a safety net during times of rising prices and be a very useful tool for capital preservation.


Aside from gold, other commodities can also help your portfolio retain its value during higher periods of inflation.
Oil, precious metals and agricultural products all tend to rise in accordance with inflation. This also translates to the higher prices for finished goods that consumers typically see at the point of purchase.
Commodities also have a low correlation to stock and bond prices, making them useful for diversification. In some cases, commodities even have negative correlations to these assets, allowing them to rise when stocks and bonds are falling.
Because they tend to be essential materials, commodities are an excellent bet for periods of unexpected inflation. During these periods, consumers tend to focus on essentials and pull back their spending on non-essentials.


The latest addition to the roster of inflation hedges is cryptocurrency, specifically Bitcoin.
This decentralized currency is seen by many crypto bulls as a form of digital gold that will retain its value even if fiat currencies experience rapid inflationary pressures. Hypothetically, the inherent scarcity of Bitcoin allows it to act as a long-term store of value.
Because cryptocurrency is still a very recent development, it’s not yet clear how well this hypothesis will hold up. The often speculative nature of cryptocurrency investment subjects Bitcoin to pressures that have nothing to do with money supply and creates a substantial amount of price volatility.
While Bitcoin’s returns have certainly outpaced inflation, it’s unclear what correlation, if any, its price really has to with the rate of inflation or the supply of the dollar.
With that said, it’s worth noting that Elon Musk is still holding his crypto assets. While he sensibly advocates owning physical assets, the famous serial entrepreneur and crypto bull obviously believes that digital currencies will continue to hold value in spite of inflation.

Inflation and Your Investment Strategy

As you can see, there are many options for protecting capital while inflation is running high. However, it’s important to balance preserving your buying power with the goal of building your wealth. By pursuing both of these goals at the same time, you’ll be more likely to succeed long-term.
Some of the investments listed above are strong performers at practically any time, while others are more specifically applicable to times when inflation is high. Real estate and stocks, for example, are good investments even when inflation is low. TIPS, by contrast, are less universally applicable.
Balancing these investments in your portfolio will help to guard against inflation while also allowing you to keep building your wealth. While inflation can still hurt, careful hedging can help you avoid its worst effects and emerge on the other side with your portfolio intact.

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