Inflation hedge

A holding expected to keep pace with the general price level, so that its owner's purchasing power is preserved rather than merely their currency balance.

Example

A 30.00% nominal rise over ten years, against 3.0% inflation and 0.65% of carry, is -9.3746% in purchasing power; holding real value would have required 43.4477%.

Important

The relationship is a tendency rather than a rule, and any carrying cost runs against it continuously. State the nominal rise the hedge would have to produce before claiming it protected anything.

Related terms

• Real return — An investment's return after subtracting inflation - what you actually gained in purchasing power.
• Purchasing power — What a given amount of money can actually buy.
• Inflation — The general rise in prices over time, which reduces how much a given amount of money can buy.
• Commodity — A physical good that is substitutable unit for unit, so it trades at a single global price rather than on the merits of any particular producer.

Lessons that explain it

• For most alternatives, the entire return is one number: the exit price minus everything paid to get there — Without a dividend or a coupon, appreciation is the whole story for art, wine and watches - and it only becomes real at an actual sale. Farmland and royalty interests instead compound the way an income-producing asset does, cash paid out year after year. (11 min)
• Sometimes the only thing that rose, sometimes the thing that fell furthest — It genuinely protects a portfolio in some shocks and genuinely makes them worse in others, and the average of those two behaviours describes neither. That is the honest case, and it is a case for a small deliberate position. (10 min)

All 578 terms in the Investing glossary