Commodities and ST TIPS help combat unexpected inflation
18 July 2019 | Portfolio construction
Unexpected inflation can reduce stock and bond returns. In this paper, we examine several investments with reputations for limiting inflation's negative impact on a portfolio. Treasury Inflation-Protected Securities (TIPS) and commodities each have benefits and risks. TIPS match unexpected inflation closely with high stability, but that stability means their inflation protection does not go beyond the invested position. Commodities also match but with higher beta, which can mean inflation protection beyond the invested position. However, commodities are a highly volatile asset class. Over long horizons, equities have outperformed inflation, which may be the ultimate protection against inflation. But for shorter-term offsets, commodities and short-term TIPS may be the best alternatives.