What Is The Best Hedge Against Inflation In 2024?

High inflation rates reduce the purchasing power of your money, so your investments lose value over time. Luckily, inflation hedges outperform the Consumer Price Index, keeping your investment portfolio healthy during an inflationary period. 

What is the best inflation hedge in 2024?

Discover 12 inflation-resistant investments in 2024, including fine wine, gold, and commodities. We’ll also explore how Vinovest can help you hedge against inflation.

12 Best Investments To Hedge Against Inflation

Here are 12 excellent asset classes to protect your investment portfolio from rising inflation.

1. Fine Wine

Fine wine is a tangible asset and acts as a fantastic hedge against inflation because it delivers positive returns and consistently outperforms the Consumer Price Index.

 In 2021, the average annual inflation rate in the US was 5%. During the same period, the fine wine market grew by 23%.

Fine wine outperforms inflation because the primary drivers of this collectibles’ market are internal factors like supply and demand. So, it's less susceptible to changes in inflation. 

For instance, if inflation rises, the dividends paid out by investments like bonds become less attractive. But wine investments don't pay dividends, so they remain unaffected. Instead, the wine market fights inflation using a demand and supply imbalance. 

On the supply side, only a minuscule amount of all wines are investment-worthy. As for demand, the global demand for fine wine is rising, and it only increases as it reaches its peak.

So, this means passionate collectors are ready to buy note-worthy vintages for astronomical prices, even during inflationary times.

Furthermore, while investments like stocks lose value during unexpected inflation, fine wine sees rising prices regardless of inflation. In fact, since 1900, wine investments have outperformed other investments that actually benefit from inflation, like real estate.

But how do you invest in fine wines?

There are several ways to begin your wine investment journey:

• You can buy, store, and sell bottles yourself.
• Online auctions allow you to invest in rare wines.
• You can buy and sell your wines through brokers.
• Invest in wine stocks.

Investing in fine wine bottles yourself can sometimes be a hassle. Tracking down trustworthy brokers to source your wines for you can be time-consuming, and finding temperature-controlled storage facilities can be expensive.

Why not let someone else do the hard work for you?

Vinovest is an expert wine investment company that offers a convenient way to source, manage, and grow a portfolio of investment-grade wines.

Sign up and track your portfolio online or in-person hassle-free. Vinovest will even store your wines in temperature-controlled bonded warehouses and match you with the highest price buyer when you decide to sell your wine.

2. Gold

Gold is another tangible asset and an alternative investment that acts as an excellent inflation hedge because as inflation rises, the price of gold does too.

This means if the dollar loses value because of inflation, gold is likely to become more expensive. 

Investors view gold as a store of value during tough economic times, and many consider it an alternative currency. 

There are various methods to invest in gold, such as:

• Buying gold coins and bullion (these don’t pay yields based on an interest rate) 
• Investing in a gold mutual fund or an ETF 
• Buying stocks of gold mining companies

3. Commodities

A commodity is a replicable good like raw materials and agricultural products that can be bought and sold. Oil, precious metals, and grain are all commodities.

Commodities and inflation have a unique relationship. When inflation increases the price of a commodity, consumer prices for relevant commodities also increase. 

For example, as inflation raises the price of a commodity like oil, commodities like petrol and gasoline also see rising prices. So, a commodity is a good inflation hedge because its price increases with inflation.

However, there is an inflation risk to investing in a commodity because it may be susceptible to technological advancement or supply and demand factors. 

So, if the supply of a commodity like coal increases, its price will drop. And as economies improve technologically and move toward renewable energy, the demand for coal will decrease - further reducing consumer prices.

4. Real Estate

Real estate is a “hard asset” (an asset with fundamental value) that can actually benefit from inflation because real estate’s intrinsic value increases with the Consumer Price Index. 

So, higher inflation means your landlord can increase your rent. 

A simple way to invest in real estate is to purchase a house using a mortgage. This allows you to pay off your property at a fixed rate. So, higher inflation doesn’t change the amount you pay.

Benefits to owning real estate are that property value can appreciate, or you can earn rental income by leasing out your property.

You can also invest in REITs (Real Estate Investment Trusts) or a mutual fund that invests in REITs.

Real Estate Investment Trusts pool the capital of multiple investors for a stake in income-producing properties like commercial real estate. 

5. Stocks

Even though the stock market can be quite volatile in the short term, it provides good long-term inflation protection.

However, not all stocks on the stock market are equal.

During inflationary times, you’ll want to look for companies on the stock market with “pricing power” to act as inflation hedges. A company with pricing power can increase its prices during inflationary times, resulting in a rise in the price of the company's shares on the stock market.

Furthermore, diversifying your growth stocks is an excellent way to hedge against inflation. 

For example, between 2001 and 2021, the S&P 500 (a key benchmark for the US stock market) generated an average return of 9.5%. If you account for the 2% average inflation rate in that period, you’re looking at about 7% annual returns.

6. TIPS (Treasury Inflation Protected Securities)

TIPS (Treasury Inflation Protected Securities) are government-backed bonds sold by the US Treasury.

TIPS is an asset class designed to protect your investment from rising inflation because the bond's par value adjusts with inflation. A higher interest rate accompanies a higher inflation rate.

TIPS have incredibly low volatility, but they won’t necessarily provide growth beyond inflation protection.

TIPS come in 5-year, 10-year, and 30-year maturities and pay out every 6 months.

7. Short-Term Bonds

Keeping your money in short-term nominal bonds protects you from inflationary pressure by keeping your money safe and accessible.

A short-term bond is more resilient during an inflationary period than a long-term bond because of the bond’s shorter maturity. So, if inflation rises, you’ll lose out less than if you had a long-term bond.

8. Cryptocurrencies

Cryptocurrency is a decentralized store of value, often described as “digital gold.”

Cryptocurrencies act as a good inflation hedge because, like gold and other precious metals, they tend to hold or increase in value over time.

Cryptocurrencies like Bitcoin also have the added benefit of having a limited supply.

The potential inflation risk of investing in crypto is that it can be volatile and doesn’t pay yields based on an interest rate.

9. Foreign Currencies

Inflationary pressure not only weakens a currency domestically but also weakens it against foreign currencies.

If you’re holding onto a currency that is losing purchasing power due to inflation, foreign money could become more valuable compared to your currency. 

For example, if you’re holding onto US Dollars and they depreciate relative to the Pound, your purchasing power in Pounds decreases. But if you were holding onto Pounds, each Pound would be worth more in Dollars.

10. Leveraged Loans

A leveraged loan is a loan made to companies with poor credit scores or high debt levels.

In these loans, multiple investors pool their money into one security.

If you’re a lender, you’ll receive scheduled payments, often with a high rate of return.These investments act as inflationary hedges because they offer interest rates that can rise with inflation. However, there’s the risk of borrowers defaulting.

11. Cash

Cash is an overlooked asset class when it comes to inflation hedging. Cash usually keeps up with inflation in nominal terms if inflation is accompanied by interest rate hikes by the Federal Reserve.

The Federal Reserve uses its inflation expectations to adjust interest rates accordingly. Rising interest rates encourage borrowing, increasing the money supply and improving cash flow in the economy.

For cash to be a good hedge against inflation, it can’t be stashed under your mattress. Instead, it must be in an account, which can compound.

A limitation is that cash doesn't increase your net worth. It just sits there, keeping up with inflation. So, unexpected inflation rates may decrease the purchasing power of your cash.

12. 60/40 Portfolio

A 60/40 portfolio is a safe, traditional mix of stocks and bonds to create a balanced portfolio. So, if unexpected inflation arises, you minimize the dent it will make on your investments.

A 60/40 portfolio’s greatest benefit is that it provides diversification. It’s also an easy rule to remember. 60% of your investments go into stocks and 40% into bonds.

A portfolio like this provides inflation protection but loses out on returns compared to a portfolio with more stocks.

Fine Wine: The Best Hedge Against Inflation

Inflation reduces the value of your money and investments over time. Trust fine wine to protect the value of your investments during an inflationary period.

If you’re interested in inflation-proofing your investment portfolio with fine wine, reach out to Vinovest.

Vinovest takes care of sourcing, authenticating, insuring, and storing your wines. It also lets you sell and deliver wines to the highest price buyers around the world - all from the comfort of your home.