10 Investments to Hedge Against Inflation

You don't have to look far to see signs of inflation. Gas prices are skyrocketing, utility costs are going up, and housing and rental prices have soared over the past two years.

And the specter of inflation has also weighed on investors, pressuring stocks lower over fears of rising interest rates.

For investors, inflation presents a conundrum, but there are ways to protect yourself from rising prices. Keep reading to see 10 ways you can hedge your investments against inflation.

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There's no more of a classic hedge against inflation than gold. The precious metal has been a form of currency and a store of value for thousands of years. And not long ago, most major currencies had their values pegged to gold through the gold standard.

Gold has long been a popular way to hedge against inflation because, unlike fiat money, central bankers can't just create more of it, so it should be a better store of value.

This year, gold is effectively acting as a hedge against rising prices as it's gained 5% in value so far this year.

ALSO READ: Best Gold Stocks for 2022

Energy prices have been one of the biggest drivers of inflation, and crude prices have surged past $100/barrel as drillers have been reluctant to increase supply after the recent bust, and the conflict in Ukraine has also spooked markets.

Because oil prices are sensitive to a number of global inputs and macroeconomic factors, they tend to rise when inflation is up.

You can get exposure to oil directly, through an exchange-traded fund (ETF) like United States Oil. However, ETFs that track futures contracts aren't generally suitable for long-term holding because of the impact of contango, which means the ETF loses money when the futures contract rolls forward.

Investors can also buy energy stocks, especially oil majors like ExxonMobil and Chevron, whose prices tend to reflect the underlying value of oil.

Stocks have fallen broadly this year over concerns about rising interest rates and inflation, but dividend stocks tend to outperform their nondividend peers during times like these.

High-priced tech stocks have gotten crushed over the past year as valuations have compressed, but dividend stocks are often valued based on the quarterly payout they offer. Additionally, dividend yields will go up as prices fall, further enticing investors.

Dividend stocks, especially Dividend Aristocrats, are reliably profitable companies that can keep rewarding investors even in recessions or challenging markets.

Two popular dividend stocks that have climbed this year are tobacco giants Altria and Philip Morris, investor favorites for riding out volatile times as smokers buy tobacco regardless of the economic climate.

ALSO READ: S&P 500's Best Dividend Aristocrats

Perhaps the best way to protect yourself from inflation is to use Treasury Inflation-Protected Securities, or TIPS. These are Treasury bonds whose prices adjust to reflect inflation. The principal, or the amount the interest rate is based on, fluctuates with the Consumer Price Index (CPI). It goes up when the index rises and it goes down when the CPI falls.

Because these are Treasury bonds, they are among the safest assets in the world, so if you're looking for a guaranteed income stream that won't be affected by inflation, TIPS are a great choice.

The housing market has soared over the past two years, and real estate still looks poised to make gains in an inflationary environment. In general, inflation means that real assets increase in price, while cash loses its value, and there's no more real asset than real estate, especially since the biggest expense for most Americans is housing.

Owning a home then should offer some protection from inflation, but you don't have to own real estate directly. You can also buy real estate investment trusts (REITs), which are real estate stocks that are required to distribute at least 90% of their income as dividends. If you're looking for inflation protection, consider buying REITs focused on both single-family housing and multifamily housing as those offer exposure to rentals, which tend to go up with inflation.

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If there's one industry that stands to benefit from inflation, it's the financial sector, in particular banks and insurance companies.

Since inflation generally leads to rising interest rates, which is expected to happen now, banks benefit as higher interest rates make it easier for them to make money off of loans.

Similarly, insurance companies tend to make money off of reinvesting premiums, and that becomes more profitable as interest rates go up.

ALSO READ: Best Bank Stocks to Watch in 2022

Another sector that does a good job of protecting investors from inflation is the utility sector, which tends to offer high dividends and is generally able to raise prices with inflation.

Utilities often operate as regulated monopolies, meaning there are price controls to prevent gouging, but that also means they are also protected from competition. While utilities aren't great for growth, they make up for it with stability and income, which is especially valuable in an inflationary environment.

Much like real estate is a real asset that can protect you from inflation, so are commodities like food, metals, and energy products.

In recent months, food prices have been climbing, and that's driven food commodity prices higher as well. It can be difficult to get direct exposure to food commodities, but ETFs like Teucrium Corn Fund offer one way to get exposure as the ETF owns mostly corn futures. So far this year, the ETF has gained 18%.

Teucrium Wheat Fund, meanwhile, has jumped 50% this year in part because of the impact from the conflict in Ukraine.

ALSO READ: Commodities Trading: What Is It?

Cryptocurrency is too new to be a definitive way to hedge against inflation, but in theory, cryptocurrency, especially Bitcoin, should work as a way to counter inflation.

After all, Bitcoin is often called digital gold by its backers, and its supply is limited at 21 million tokens, meaning it doesn't lose its value the way fiat currency does when the money supply is increased.

Over the past few months, Bitcoin has not responded to inflation the way bulls expected it to, but that could change if the cryptocurrency gains more credibility and investors buy into the digital gold argument.

Healthcare may not be typically associated with being inflation proof, but there are several reasons why the sector is worth considering.

Healthcare prices tend to be service driven rather than product driven, but it's easier for companies to pass along costs in an inflationary environment. Additionally, healthcare prices are often opaque, which also helps companies raise them.

The healthcare sector also benefits from inelastic demand. People need healthcare, and there's often no substitute for a prescription drug or a medical procedure.

Finally, healthcare stocks also tend to pay dividends, giving investors reliable cash flow even if the stock price falls.

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There's no telling where inflation will go from here. The Federal Reserve is expected to raise its benchmark interest rate by a quarter of a percent later this month, but that alone is unlikely to have a significant effect on the inflation rate.

Supply chain challenges, the "Great Resignation," and a tense geopolitical situation will all play a role in consumer price movements.

Still, there are a number of steps you can take as an investor to lower your risk profile and make your portfolio resistant to a long-lasting high-inflation environment.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns and recommends Bitcoin. The Motley Fool has a disclosure policy.