How To Hedge Against Inflation (2024)

More and more Americans are feeling the pinch of rising inflation. A recent Pew Research Center survey found that inflation is Americans’ top concern, followed by health care affordability, violent crime and gun violence.

The February consumer price index (CPI), which measures the cost of everyday essentials, showed that U.S. inflation rose 6.0% over the past 12 months. With that in mind, here are a few steps that you can take right now to protect your money from rising inflation.

How Inflation Affects Your Money

Inflation is the gradual increase in the prices of goods and services throughout the economy. It is measured by calculating the percentage change in a price index over a period of time, typically over the prior 12 months.

When inflation rises, it can cause headaches for consumers and businesses. For consumers, it can lead to higher prices and decreased purchasing power. For businesses, it can lead to lower profits and increased costs.

5 Ways to Hedge Against Inflation

When inflation is high, you may find that your income doesn’t go as far as it used to. But there are steps you can take now to hedge against rising prices.

1. Move Your Money into a High-Yield Savings Account

If you have your money stashed in a checking or basic savings account—or worse, at home—inflation erodes the value over time.

You can reduce your losses by moving the money you can’t risk investing, like your emergency fund or house down payment savings, to a high-yield savings account.

Even the best high-yield savings accounts’ annual percentage yield won’t match the inflation rate. But your money will earn a higher yield than other bank accounts. According to the FDIC, the average savings account APY was 0.37% as of March 20, based on the latest data available.

But with a high-yield savings account, APYs are as high as 4.29%. You can check out our picks for the best high-yield savings accounts to find an account.

2. Buy Treasury Bonds

There are two popular types of treasury bonds that are good investments for individuals who are worried about inflation:

• Series I Savings Bonds. Series I bonds are interest-bearing government savings bonds. They are a low-risk option that earn interest and are protected against inflation. They have an annual interest rate based on a fixed rate and a semiannual variable rate based on inflation. Series I bonds issued between May and October 2022 have a rate of 9.62%.
• Treasury Inflation-Protected Securities. TIPS are designed to help investors protect themselves against inflation, and TIPS are indexed to inflation. As inflation rates rise, TIPS adjust in price to maintain their value.

You can buy both types of treasury bond at TreasuryDirect.gov.

3. Invest in the Stock Market

Inflation causes your money to be worth less over time. For that reason, it makes sense to keep the money you may need, like an emergency fund, in a liquid and easily accessible savings account. Other funds should be invested in the stock market to grow your money.

While the stock market may experience dips, historically, it’s delivered returns that have beat inflation. Over the past 95 years, the average stock market returns clocked 12.3% per year.

You can invest through a retirement account like a 401(k) or individual retirement account (IRA). You can also open a taxable brokerage account. If you aren’t sure where to start, you can use investment apps that help you choose investments and manage your portfolio.

4. Diversify Your Portfolio

If you invest in the stock market, it’s important not to invest in only a handful of stocks. If a company fails or its price drops, you could lose substantial money.

Portfolio diversification lowers the level of risk. If one company performs poorly, the performance of the others can offset its losses, minimizing the impact on your money.

Fidelity Investments, a multinational company that serves over 40 million investors, recommends these the following for a diversified portfolio:

• Domestic Stocks. Domestic stocks are shares of American companies. Many U.S. stocks have historically delivered solid returns, so domestic stocks are a cornerstone of most portfolios. Although you can invest in individual stocks, you can also use a broad market index fund to invest in many domestic stocks.
• International Stocks. With international stocks, you invest in foreign companies. Companies based in other countries often perform differently than U.S. companies, so you have the potential for higher returns. However, there is also the potential for higher risks.
• Bonds. Typically less volatile than stocks, most bonds provide regular interest income and safeguard against market fluctuations.
• Short-Term Investments. Short-term investments include certificates of deposit (CDs) and money market funds. These are very conservative investment options, providing a lower rate of return than stocks, but are less risky than other options.

5. Explore Alternative Investments

If you already have savings in a high-yield savings account, invest in the stock market and have a diversified portfolio, you may want to consider alternative investments to hedge against inflation. Popular alternative investment options include:

• Commodities. Commodities are raw materials used to create consumer goods. They include agricultural products, metals, crude oil and natural gas.
• Real Estate. Many investors are purchasing real estate investments to take advantage of the demand for housing and beat inflation. Buying property is one way to invest in real estate, but buying shares of a public real estate investment trust (REIT) are much more liquid and easier to purchase.
• Gold and Precious Metals. Investors worried about the decreasing value of a dollar may be interested in buying gold or precious metals. The price of gold and other precious metals is usually independent of other asset classes.

As inflation rates rise, it’s a good idea to review your finances and see if any improvements can be made to protect your money. Investing in stocks, bonds and other traditional investment vehicles can help you counter rising inflation.

If you want to explore alternative investments, several options are available. Whichever route you choose, it’s important to diversify your portfolio to minimize the risk of losing money if one investment performs poorly.