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  • Writer's pictureDavid Brown

How Do Investments Perform Under Inflation?

It seems like everyone is talking about inflation – and for a good reason. After so many years of low inflation – so low it was not worth mentioning and certainly nothing to worry about – the situation has changed dramatically. In the U.S., inflation is at its highest level in many decades, and most other countries are also seeing prices jump.

The reasons are well known – high energy and grain costs due to Russia’s invasion of Ukraine; fiscal stimulus (especially in the U.S.), COVID-related shortages of semiconductor chips that have reduced the supply of new cars, pushing up the cost of used cars; low unemployment and high demand for workers that is pushing up wages in virtually every sector of the economy; shipping costs that have gone through the roof because a supply and demand imbalance snarled supply chains – it goes on and on.

High inflation can hurt both stocks and bonds. Stock prices can fall as the outlook for demand and future profits become uncertain. Bond prices fall when interest rates rise, and with inflation running hot, the U.S. Federal Reserve is expected to continue to raise interest rates this year. Does that mean it is time to hide our money under the mattress and wait until things settle down? Or is there an investment strategy that will perform well as a hedge against inflation?

In this article, we look at how returns for a range of investment types – stocks, inflation-protected Treasuries, real estate, gold, and other commodities – correlate to changes in inflation. If we can find an asset class that is highly correlated to inflation, it might be good to include that asset class in our portfolio when inflation is high. Of course, the caveat is that when inflation declines, there is a good chance the returns from that asset will also decline.

Inflation and Investment Returns

First, we explain how we measure inflation and detail the investments we considered as possible “hedges” against inflation. As inflation has not been of considerable concern in the U.S. since the 1980s, we do not have data covering many periods of very high inflation. Furthermore, it is probably not relevant to make decisions today using data from the state of the economy 40+ years ago. So, we use data from 1999 or later, depending on availability.


We use the month-to-month percentage change in the U.S. Consumer Price Index for Urban Consumers (CPI-U) as our inflation measure. Although the media often cite annual changes in inflation, when looking for an asset whose returns offset inflation, we do not want to wait an entire year to see what that return might be. So, we use monthly inflation changes and monthly returns for our investment candidates.

Here are the monthly percentage changes in the CPI-U since 1999. Note the zig-zag pattern. This pattern is because energy and food prices often have big swings from one month to the next, significantly impacting the overall CPI. Still, we see an upward trend since early 2020.

The U.S. Stock Market

We use monthly returns on the S&P 500, representing about 80% of the total U.S. stock market. While this excludes small-cap stocks, the result would be almost the same if they were included (but a bit more volatile). The following graph shows the relationship between monthly changes in the CPI-U and monthly returns from the S&P 500.

We can see that the U.S. stock market returns and the CPI-U typically do not move in the same direction or the opposite direction (note that the change in the S&P 500 is shown on the right-hand side of the graph). Sometimes inflation goes up, and the stock market goes down; sometimes, the two go up and down together. So, the U.S. stock market is not a reliable way to offset the pain of inflation. The correlation between the two is weak; only 0.04 over the past 23 years, which is essentially zero. The highest and lowest possible correlations are +1 and -1, so a value of zero means there is no consistent relationship, positive or negative, between change in inflation and changes in the stock market.


Many people think of gold as a good inflation hedge. To put that idea to the test, we look at monthly returns on the largest gold ETF (as a practical matter, it is not feasible for most investors to hold actual gold, as few people want to store bullion in the house).

This graph shows the monthly changes in the CPI-U and monthly returns from the SPDR Gold ETF. The data began in 1995 when the gold ETF was launched. Again, we do not see a strong pattern between the two, and in fact, the correlation is only 0.02 - again, essentially zero. So, the “gold is a great inflation hedge” story does not hold up.

Real Estate and Treasury Inflation-Protected Securities (TIPS)

What about commercial real estate or Treasury Inflation-Protected Securities (TIPS)? We use a well-known index for real estate investment trusts (REITs) and a large ETF that holds TIPS of various maturities to see whether either of these are reliably good inflation hedges.

Perhaps surprisingly, neither of these investments does a great job of offsetting changes in inflation. The overall correlation between the REIT index and the CPI-U is 0.042, similar to the S&P 500. However, if we look closely, we can see that the REIT index does tend to move up when inflation spikes. A deeper analysis confirms this but ignores how commercial real estate performs when inflation is low.

The correlation between the TIPS ETF and the CPI-U is only 0.04. We used an ETF that holds a range of TIPS, and they do not all move together as the CPI-U changes.


We said earlier that changes in the CPI-U are heavily impacted by energy and food prices, so we also look at a commodities index. This includes oil and natural gas and wheat, cattle, and other agricultural items that affect what we pay for food. Now we see something interesting. Not surprising, but interesting.

Energy and food prices are significant contributors to inflation, so this commodities index tracks changes in the CPI-U more closely than anything else we have considered. The correlation between the two is 0.62. But does that mean you should invest heavily in commodities? Probably not, as it is a highly volatile asset class.

Diversification to the Rescue

We always say that investors should diversify, and it turns out that diversification may be the best way to protect your investment portfolio from inflation. To complete this analysis of how different types of investments may or may not provide a hedge against inflation We created a portfolio that combines all of the asset types discussed here: 50% U.S. stocks and 12.5% each of gold, TIPS, real estate, and commodities. *Note that this is not how Gold Medal Waters invests for our clients – this is purely for illustrative purposes. Our hypothetical portfolio has a correlation of 0.45 with the CPI-U and is less volatile than any of the individual asset classes we considered. Although the average monthly return of this diversified portfolio is lower than the average monthly returns for the individual asset classes except for TIPS, its volatility is extremely low and therefore it offers the best “risk-adjusted” return (risk-adjusted means looking at the return on an investment relative to the level of volatility involved in earning that return).

Inflation is scary, particularly for retirees on a fixed income and families on a tight budget. So, it is reasonable to look for an investment with returns that reliably offset high inflation without sacrificing too much upside when inflation goes back down. The challenge is that investment returns are uncertain (and in our view, anyone who promises a “sure thing to beat inflation” is immediately suspect). This analysis shows that the tried-and-true rule, “diversify your investments,” is probably the best approach to managing your portfolio in periods of high inflation.

If you have questions about your investment strategy, reach out to your Gold Medal Water advisor.

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