The Best Investments for an Inflationary Environment

If you haven’t been worrying about inflation and how it affects your portfolio, it’s well past time. Inflation hit a 31 year high in October 2021 at a rate of 6.2% year-over-year, and economists expect it to persist for another year at least. The labor market is struggling through the Great Recession, and employers have to hike wages. Prices for gas, food, heating, and other essentials are nearing record highs. The severe global supply chain shortages are crimping supply, and at the same time, demand for products is outpacing the market’s capacity to produce. Trillions of dollars in government stimulus worldwide helped the economy recover from a recession, increasing demand. Of course, these factors combined have led to some of the most elevated inflation levels in recent history among the G20 nations:

Whether or not it will be “transitory” remains to be seen, but it’s fair to say that most economists and central banks have underestimated the persistence so far. With this scenario in mind, if you haven’t been planning to find the best places to invest your money during inflationary periods, you are slow to the game. Below, we will discuss the historically best asset classes to invest in during inflationary periods and how you can take advantage of your portfolio.

The Best Asset Classes to Combat Inflation

If your portfolio is sitting in cash right now, you are losing purchasing power significantly. The only way to combat it is to invest and invest in a way to protect your portfolio against inflation. So, where is the best place to put your money in inflationary environments? According to a Wells Fargo study that looked at inflationary periods starting in 1972, commodities are the way to play it.

During rising inflationary environments, Gold, Oil, Agriculture, Energy, Industrial Metals, and Precious Metals tend to outperform stocks overall, with impressive positive return characteristics. Stocks, of course, did perform better than bonds overall 78% of the time. However, overall stock performance was negative in 2 out of 9, so it would be challenging to name stocks as a clear winner here. Oil seems to be the biggest benefactor during inflationary periods, showing 100% positive returns in those nine periods and outperforming bonds and stocks 86% and 71% of the time.


Tangible assets deserve some love here, too. In a more recent study looking at periods of a positive inflation surprise, real estate, and infrastructure investments have had more robust returns in some cases. With real estate, landlords tend to charge higher rents in high-demand, inflationary environments – and as a result, real estate values usually increase. Real Estate Investment Trusts (REITs) also provide some natural protection as they usually can grow their dividends due to similar factors.

As for some investments to avoid, fixed-income investments tend to perform poorly during inflationary periods. As inflation increases, central bankers will typically increase interest rates to slow the economy and protect against runaway inflation. These interest rate hikes will make interest payments from existing fixed-income investments less competitive, causing prices to fall. One way to combat this is to allocate to Treasury Inflation-Protected Securities (TIPs), fixed-income assets where the principal amount will increase with inflation.

In Summary

Inflation appears here to stay, at least over the medium term. Supply chain shortages due to the Covid-19 pandemic appear to be far from complete, government stimulus programs around the world continue to print money, and the most likely way the jobs market will regain some balance is by higher wages. If you want to protect your portfolio against inflation, ensure you have some exposure to commodities, equities, REITs, and some tangible assets, if possible. For your fixed-income allocation, it might be time to add some TIPs for protection. After all, staying in cash is not an option when you lose 6.2% of your purchasing power.

Published By: Steven Cawiezell