What Is the Best Investment for Inflation? – Top 6 Options to Consider!

In recent years, the consumer price index (CPI) has risen at rates not recorded in at least four decades. Consequently, investors face new challenges as they try to devise plans and strategies to generate real returns when inflation hits.

A person may consider different options for their investment portfolio, including popular traditional inflation-resistant assets, such as commodities, gold, real estate, or consumer cyclical stocks.

Other less popular options also seem to perform well during periods of economic uncertainty or the inflationary cycle due to pandemic-related circumstances. This group includes investments in the semiconductors, travel, and infrastructure sector.

However, growth stocks, cash, and bonds are much less attractive during the inflationary cycle as they can more easily succumb to market movements and negative economic conditions.

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What Happens When Inflation Rises? What Does the Consumer Price Index Say?

Based on data from the CPI, last year’s inflation rose 8% on average each year. It’s the highest figure in the last 20 years.

While experts expect inflation to ease in 2023, early returns are similar to the trends seen last year, with data showing a 6.4% inflation rate in January.

Why do inflation and predictions about economic movements make investors turn to other alternatives? The short answer is that high inflation can impact these instruments.

Rising prices can affect cash purchasing power and depressed returns on bonds, causing many investors to question whether their strategies can help them meet their financial goals or whether they should consider other options.

During the pandemic, for example, the health crisis’ economic impact on all countries worldwide presented different challenges for some investors and opportunities for others.

Based on that data, these are the best investments for inflation you can consider this year.

Top 6 Investments When There's Rising Inflation

#1 Gold

This precious metal is one of the best inflation hedges you can consider, especially if the local currency has started to lose value.

Gold is a real asset that usually maintains the same value over time and protects investments against inflation or other negative economic events.

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Precious metals – including gold, silver, platinum, and palladium – can be a stable investment during periods of economic uncertainty.

Also, it’s a great choice for those who want to diversify their portfolio to protect their hard-earned money from inflation.

#2 Non-Gold Commodities

Investing in commodities may be one of the best options for those hoping to leverage powerful inflation hedges to protect their hard-earned money. Some popular options are agricultural products and raw materials, which can be traded as securities.

Many commodity traders buy and sell natural gas, oil, beef, grain, coffee, and others. In these cases, investors use futures contracts and exchange-traded funds to include these assets in their portfolios.

#3 Equities

When it comes to inflation hedges, equities are among most investors’ options. Many put their money in these instruments because history has shown that stocks tend to produce returns that exceed rising prices.

However, all stocks perform differently, meaning some may outperform others during periods of high inflation.

During 2022, the equities that performed best were related to dividend growth, consumer products, small-cap, energy, emerging, and financial markets.

Many investors have also bet on equities from industries that have experienced a rebound after the pandemic, including hospitality, leisure, and travel.

#4 Real Estate or Real Estate Investment Trusts (REITs)

During 2022 and part of 2023, some investors also considered residential real estate a haven. In fact, many believe that buying property is another inflationary hedge and direct percentages of their portfolios into them.

Furthermore, in recent years, home construction and building materials have also been seen as inflation-busters.

Many investors have also put their money in real estate investment trusts, also known as REITs.

If you choose these companies to put your money there, you’ll invest in real estate without buying property.

Commercial real estate investments can also be good options for those hoping to build a diversified portfolio but looking for inflation protection. However, these alternatives are better for those with more experience in the industry.

#5 Savings Bonds

Those who want to avoid inflation putting their investments at risk have also turned to savings bonds. If you’d like to hold these assets, you should buy them directly from the US Treasury.

Savings bonds are considered safe investment alternatives because their value cannot decline. Therefore, they can be good options when you want your portfolio to be more stable when rising inflation hits.

#6 Treasury Inflation-Protected Securities (TIPS)

Treasury inflation-protected securities (TIPS) are also considered excellent investment opportunities during inflation and periods of economic turmoil.

TIPS are government-backed bonds that typically increase in value when the consumer price index spikes. Consequently, there’s less inflation risk.

Since TIPS bonds pay interest twice a year (every six months), are backed by the federal government, and are issued in 5 to 30 maturities, they’re considered one of the safest investment alternatives.

However, TIPS prices rose sharply as the inflation outlook rose in 2021. Therefore, these investment instruments are no longer as popular and tempting as they used to be.

Are These Investment Options Good For Everyone?

Although these assets are seen as hedges during inflationary periods, they are not always good options for every investor.

Choosing the best alternative investment depends on different factors, such as each person’s risk tolerance, individual goals, time horizons, and more.

Since people nearing retirement tend to have less risk tolerance than younger people, they often choose cash or fixed-income investments.

Furthermore, even if inflation and interest rates rise, risk-averse investors shouldn’t put their money into risky investments, such as commodities, mutual funds, bonds, or equities.

Instead, most investors will analyze their situation and objectives to design an effective strategy, build a diversified portfolio with inflation hedges, and try to stay close to their asset allocation.

In addition, the Federal Reserve often raises interest rates to combat high inflation. In these cases, borrowing is usually more expensive. Therefore, when interest rates are still low, many investors take out mortgages or refinance high-interest-rate loans.

What Is The Best Investment Option Among All?

Money plays a key role in your life now and after retirement. That’s why you should choose the most beneficial investment alternative.

If you want to have a diversified portfolio, you can put part of your money in individual stocks, bonds, real estate, or other paper investments.

However, not all options provide security during periods of high inflation. Fortunately, when the economy falters, gold shines its brightest.

While gold and other precious metals won’t make you rich overnight, it’s a great inflation hedge. Also, if you have a well-designed investment strategy, it can secure monetary growth.

As inflation rises and the Federal Reserve raises interest rates, your money must also grow to beat it. Therefore, investing in gold can be one of the best decisions you can make.

Why Is Gold Valuable?

Precious metals, such as gold and silver, have existed for many centuries and have been part of history. In addition, many civilizations used them as currency.

However, gold’s value goes beyond its historical significance. This precious metal is rare and coveted around the world.

For centuries, gold has been used to decorate palaces, jewelry, clothing, religious items, and more. Many people even used it to show off their wealth.

Now, the yellow metal is still valuable and coveted for its beauty and rarity. However, it has different and practical applications. In recent years, gold has been used in the technology, circuitry, and dentistry industry.

As mobile devices and computers become more important in the digital age, this precious metal’s demand increases. Consequently, its price continues to rise.