Chicago Fed, Report: Does Not Fit All, Inflation Hedging by Index and Horizon

“There is no one-size-fits-all approach to inflation hedging; the optimal hedge depends on the particular types of prices that an investor is exposed to and at which horizons. Over the last twenty years, we find that commodities and commodity-related stocks and currencies are generally successful in hedging headline consumer inflation, but this mostly seems to reflect their significantly positive relation with energy prices. Hedging core inflation is harder. At horizons of less than a year, there is little protection available, except for TIPS. At longer horizons, short-term nominal bonds and real estate provide a decent hedge, and there is some evidence supporting certain stock-market strategies. Core producer prices and wages are the most difficult types of inflation to hedge, although real estate and short-term nominal bonds provide some protection. And, since wages are a particularly large component of the cost of non-housing services, the same instruments do a decent job hedging service inflation. Finally, house prices can be effectively hedged through REITs and other instruments that provide broad exposure to this sector.”