Tame Inflation Risks With These Hedging Strategies

FOR MANY INVESTORS in the U.S., high inflation may feel like a distant worry—an historical footnote from the 1970s or a problem of poorly run economies in emerging markets. But there are signs indicating that some investors are worried. Bloomberg can help you see how they’re hedging their portfolios and what you can do to prepare for a dramatic change in prices.

- CONSTANTIN COSEREANU, JOHN BRIDGE, and JUAN CHAMORRO

First, let’s look at why inflation should be on your mind now. The government’s deficit spending to combat impacts of the coronavirus pandemic has wreaked havoc on the national budget. The Committee for a Responsible Federal Budget projects that debt held by the public will surpass gross domestic product by the end of this fiscal year and by 2023 eclipse the prior record set after World War II. Meanwhile, the Federal Reserve’s asset- purchasing spree over the last several months expanded its balance sheet to a record level.

These unprecedented government interventions should theoretically have some consequences, including rapid inflation, but economists don’t seem to back that idea right now. Run {ECFC } to find economic forecasts out to 2022. Remarkably, forecasts for price indexes are all pretty much in line with the central bank’s 2% target (FIG. 1).

Still, money talks, and market investments suggest there are some concerns about inflation. Start by looking at gold. Run {GCA GP }. Gold is often seen as a hedge against inflation because its value rises with any decrease in the dollar’s purchasing power. It’s been on a tear since March, surging above $2,000 in August for the first time.