How Inflation Hedging Works

An inflation hedge can be an investment that preserves or increases its value as inflation rises. The key goal of this kind of investment is to protect your wealth by outpacing or matching inflationary pressures, which commonly impact most asset classes in particular markets. An effective inflation hedge can include many different investment instruments, such as for example stocks, commodities, and real estate.

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

best ways to hedge against inflation can help protect the worthiness of an investment. Certain investments might seem to supply a significant return, but when inflation is factored in, they could be sold at a loss. For example, if you choose stock that provides a 5% return, but inflation is 6%, you are losing that 1%. Assets which can be considered an inflation hedge could 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.
For example, if the dollar loses value from the consequences of inflation, gold will are more expensive. So an owner of gold is protected (or hedged) against a falling dollar because, as inflation rises and erodes the worthiness of the dollar, the price of every ounce of gold in dollars will rise as a result. Therefore the investor is compensated because of this inflation with an increase of dollars for every single ounce of gold.

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

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

Limitations of Inflation Hedging
Inflation hedging has its limits and at times 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 investing in commodities as an inflation hedge usually are 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 effectiveness of inflation hedging.