Best Ways to Invest During High Inflation Periods

High inflation can feel like a storm battering the value of your hard-earned savings, but with the right strategies, you can emerge stronger and more resilient. Preserving your purchasing power and even growing wealth during periods when consumer prices are rising rapidly is not only possible—it’s a hallmark of savvy investing.

In this article, we explore how inflation impacts different asset classes, identify investments that historically outperform when inflation soars, and share practical steps to construct and maintain a robust portfolio that weathers price spikes.

Understanding How Inflation Impacts Investments

Inflation measures the rate at which the general level of prices for goods and services rises, eroding the purchasing power of money. When annual inflation climbs above historical norms—say, beyond 5%—traditional fixed-income investments and cash holdings begin to lose real value.

Key effects include:

• Purchasing Power Loss: A dollar today buys less tomorrow, undermining savings accounts, CDs, and plain-vanilla bonds.
• Mixed Stock Returns: Companies with strong pricing power can pass on costs to customers, while others see profit margins shrink under rising input costs.

Asset Classes That Shine During High Inflation

Not all investments react the same way when prices rise. Let’s dive into the vehicles that can serve as effective inflation hedges and those best used in combination.

Treasury Inflation-Protected Securities (TIPS)

TIPS are U.S. government bonds specifically designed to adjust their principal based on the Consumer Price Index (CPI). When inflation rises, so does your principal balance—and the interest you earn.

• Pros: Principal adjusts with CPI, offering steady inflation-adjusted returns.
• Cons: Starting yields are low (often around 2%), and they can underperform during low-inflation periods.
• Popular Funds: Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), Schwab U.S. TIPS ETF (SCHP).

Commodities

Commodities like energy, metals, and agricultural products often move in tandem with inflation. As input costs rise, commodity prices can spike, delivering outsized gains. However, their volatility can be extreme.

• Key Picks: Industrial metals (copper, aluminum), energy (oil, natural gas), agriculture (corn, soy).
• Vehicles: Commodity index funds, futures-based ETFs, and actively managed mutual funds.

Equities with Sector Focus

Certain equity sectors have historically kept pace with or outperformed inflation:

Energy stocks outperform inflation about 74% of the time, while equity REITs do so roughly 66% of the time. Target sectors where pricing power offsets rising costs.

Real Estate

Direct real estate ownership or equity REITs can provide a natural inflation buffer. Rent and property values tend to rise over time, aligning income streams with broader price trends.

Mortgage REITs, by contrast, often hold fixed-rate debt and may underperform when interest rates climb.

High-Yield and Short-Term Bonds

High-yield bonds offer elevated coupon payments that can outpace moderate inflation, but they carry higher credit risk. Short-term bonds mitigate duration risk and can be rolled over at higher rates more frequently.

International Stocks

Diversifying into non-U.S. equities can help if the dollar weakens during U.S. inflationary cycles. Overseas markets may offer sectors or currencies with different inflation dynamics.

Strategic Approaches to Building an Inflation-Resilient Portfolio

Beyond picking individual assets, holistic strategies can strengthen your defenses:

• Diversify across asset classes—mix equities, bonds, real estate, and commodities to reduce single-market shocks.
• Use dollar-cost averaging to smooth entry points and manage volatility risk.
• Create bond/CD ladders to stagger maturities and capture rising yields over time.
• Regularly rebalance your portfolio to maintain target allocations.
• Maximize employer retirement matches to secure a guaranteed return above inflation.

Risks and Limitations to Watch Out For

Even inflation-hedging assets have drawbacks. Commodities can suffer boom–bust cycles unrelated to consumer price trends. Gold often underperforms during moderate inflation bursts and truly shines only in extreme or unexpected price surges.

Sector overexposure—such as too much energy or REIT concentration—can introduce undue volatility. Maintain a balanced approach and revisit your allocations as market conditions evolve.

Key Takeaways and Actionable Steps

Inflation need not erode your financial future if you adopt evidence-based strategies and remain disciplined. Here’s a concise roadmap:

• Assess your current allocations—identify cash or bond holdings most vulnerable to inflation.
• Introduce TIPS or inflation-adjusted bond funds to anchor the fixed-income sleeve.
• Allocate a portion of equity exposure to energy, financials, and REITs for targeted inflation protection.
• Consider a commodities allocation—start small, scale responsibly, and monitor volatility.
• Stay diversified internationally to hedge currency and regional price dynamics.
• Rebalance semi-annually and adjust ladders or DCA contributions in response to interest-rate shifts.

By weaving together these asset classes and strategies, you craft a portfolio built to withstand rising prices while still pursuing long-term growth. Start today, stay informed, and let disciplined action be your guide as inflationary cycles ebb and flow.