How Inflation Hedging Works

An inflation hedge is an investment that preserves or increases its value as inflation rises. The key goal of this kind of investment is to safeguard your wealth by outpacing or matching inflationary pressures, which commonly impact most asset classes specifically markets. A successful inflation hedge can include a variety of investment instruments, such as for example stocks, commodities, and real estate.

Among all forms of assets, stocks are the most typical inflation hedge options. Historically, stocks have delivered more returns than inflation, making them an attractive selection for investors looking to guard their capital. Blue-chip stocks are a popular inflation hedge option, and their dividends tend to steadfastly keep up with inflation thanks for their resilient financial performance.

inflation hedge might help protect the worthiness of an investment. Certain investments may appear to provide a significant return, however when inflation is factored in, they could be sold at a loss. Like, if you buy stock that gives a 5% return, but inflation is 6%, you are losing that 1%. Assets which are considered an inflation hedge could possibly be self-fulfilling; investors flock for them, which keeps their values high even although the intrinsic value may be much lower.

Gold is widely considered an inflationary hedge because its price in U.S. dollars is variable.
As an example, if the dollar loses value from the results of inflation, gold tends to be much more expensive. So a manager of gold is protected (or hedged) against a falling dollar because, as inflation rises and erodes the worthiness of the dollar, the expense of every ounce of gold in dollars will rise as a result. Therefore the investor is compensated for this inflation with an increase of dollars for every ounce of gold.

A Real World Exemplory case of Inflation Hedging
Companies sometimes take part in inflation hedging to keep their operating costs low. One of the most famous examples is Delta Air Lines purchasing a gas refinery from ConocoPhillips in 2012 to offset the risk of higher jet fuel prices.

To the extent that airlines make an effort to hedge their fuel costs, they typically do so in the crude oil market. Delta felt they could produce jet fuel themselves at a less expensive than buying it on the market and in this way directly hedged against jet fuel price inflation. During the time, Delta estimated that it would reduce its annual fuel expense by $300 million.

Limitations of Inflation Hedging
Inflation hedging has its limits and occasionally can be volatile. For instance, Delta has not consistently made money from its refinery in the years since it was purchased, limiting the effectiveness of its inflation hedge.

The arguments for and against purchasing commodities being an inflation hedge are often centered around variables such as for instance global population growth, technological innovation, production spikes and outages, emerging market political turmoil, Chinese economic growth, and global infrastructure spending. These continually changing factors may play a role in the potency of inflation hedging.