What Is Inflationary Risk?

Inflationary risk is the potential for inflation to erode the real value of an investment, asset, or income stream. When inflation rises unexpectedly, it reduces purchasing power, meaning the actual returns on investments may fall short of expectations.

Understanding Inflationary Risk

Inflationary risk affects any asset or income stream tied to a fixed monetary value. The nominal return of an investment may appear stable, but its real return—the actual purchasing power after inflation—is what truly matters.

Since inflation reduces the value of money over time, investors who fail to account for it may end up with lower-than-expected returns. This risk is especially significant for fixed-income investments like bonds. If inflation surges, a bondholder locked into a fixed coupon rate may see the purchasing power of their returns steadily decline.

For example, an investor who purchases a 30-year bond with a 4% fixed interest rate could suffer significant losses if inflation rises to 12%. Each year, the bond's fixed payments would lose more value, ultimately diminishing the investor’s wealth.

While inflation can erode the value of fixed-income assets, equities and physical assets like real estate often perform better in inflationary environments. Investors can mitigate inflationary risk by diversifying their portfolios and considering inflation-protected securities.

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Best Inflation-Proof Investments

Not all investments are equally affected by inflation. Some assets are more resistant to inflationary pressures, while others can even benefit from rising prices. If you’re looking for strategies to protect your wealth and maintain purchasing power during economic uncertainty, here are some of the best inflation-proof (or inflation-resistant) investments to consider.

1. I Bonds

Series I Savings Bonds, commonly known as "I Bonds," are issued by the U.S. Treasury and are specifically designed to protect investors from inflation.

I Bonds offer a yield composed of two components:

• A fixed interest rate, which remains the same throughout the bond’s life.
• An inflation-based adjustment, which is recalculated every six months.

For example, I Bonds issued from November 2024 through April 2025 come with a fixed rate of 1.20% and an inflation adjustment of 1.90%, resulting in a total initial yield of 3.11%. (The percentages don’t add up exactly due to rounding.)

While I Bonds have some limitations, such as a holding period requirement and interest penalties for early withdrawal, they remain an excellent choice for investors looking to safeguard their purchasing power against inflation.

2. Real Estate Investment Trusts (REITs)

Real estate is historically a strong hedge against inflation, as property values and rental income generally rise over time. Investors can gain exposure to commercial real estate without directly owning property by investing in Real Estate Investment Trusts (REITs).

REITs own and manage income-generating real estate properties such as office buildings, apartments, shopping centers, and industrial facilities. These investment vehicles are required to distribute at least 90% of their taxable income to shareholders as dividends, making them an attractive income-generating investment.

Rental rates tend to increase with inflation, allowing many REITs to maintain or even grow their dividend payments over time. Some REITs have a long history of raising their annual dividends by 4% or more, providing a built-in inflation hedge.

It’s important to note that REIT stock prices can be sensitive to rising interest rates, which may lead to short-term volatility. However, the underlying business of REITs typically remains strong during inflationary periods.

3. Commodities

Commodities, including energy, metals, and agricultural products, tend to perform well during inflationary periods. This is because inflation often leads to higher prices for raw materials, benefiting companies involved in mining, energy production, and agriculture.

Investors can gain exposure to commodities in several ways:

• Investing directly in commodities such as gold, silver, oil, or agricultural products.
• Buying stocks of companies that produce commodities, such as oil companies and mining firms.
• Investing in commodity-focused exchange-traded funds (ETFs), such as the SPDR S&P Metals & Mining ETF (XME), which tracks stocks in various metals industries.

For example, in 2022—a year of high inflation—the XME ETF gained 13%, while the broader S&P 500 returned -18%. This demonstrates how commodities can serve as an effective hedge against inflation.

4. Stocks of Companies with Pricing Power

During inflationary periods, consumers tend to reduce discretionary spending. However, companies that sell essential goods and services—such as healthcare, utilities, and auto parts—often have the ability to pass rising costs onto customers without significantly affecting sales.

One example is Advance Auto Parts (AAP), a retailer specializing in vehicle maintenance products. As inflation increases the cost of new vehicles, more people may choose to keep and repair their existing cars rather than buy new ones, benefiting auto parts retailers.

Investing in companies with strong pricing power helps ensure that your investments maintain their value even as inflation rises.

5. High-Yield Savings Accounts, CDs, and Money Market Accounts

While traditional savings accounts don’t typically offer high returns, they become more attractive when inflation pushes interest rates higher. As of November 2024, some reputable banks offer savings account interest rates above 4%, making them a competitive option for parking cash in a rising-rate environment.

The key benefit of these accounts is liquidity—you can access your money whenever needed while still earning a return.

However, if inflation subsides and interest rates decline, savings rates will likely decrease as well. In such cases, investors may choose to reallocate funds to higher-yielding investments.

6. Short-Term Bonds

While bonds are generally vulnerable to inflationary risk, short-term bonds are a better choice than long-term bonds in a rising-rate environment.

For example, if you purchased a 30-year Treasury bond with a 2.5% interest rate, but new Treasuries start offering 4%, the market value of your bond will decline significantly. However, short-term bonds (such as one-year Treasuries) are less affected by these fluctuations because they mature quickly.

As of November 2024, the one-year Treasury yield was approximately 4.3%, making it a relatively safe, short-term inflation hedge.

7. Bank Stocks

Banks are among the few businesses that can benefit from inflation, particularly when rising inflation leads to higher interest rates.

Banks generate profits by taking in deposits and lending out money at higher interest rates. When interest rates rise, their profit margins typically expand, leading to increased earnings.

Banks that focus primarily on consumer lending, such as Wells Fargo (WFC) and U.S. Bancorp (USB), tend to see the greatest benefit from inflation-driven rate hikes. While bank stocks can be volatile, they remain a strong long-term inflation hedge.

8. Compound Real Estate Bonds (CREB)

An innovative and inflation-resistant investment, Compound Real Estate Bonds (CREB) offer investors a fixed income return of 8.5% APY, backed by real estate assets and U.S. Treasuries.

CREB provides the following inflation-resistant features:

• Fixed High-Yield Returns: Unlike traditional bonds, which lose purchasing power in high-inflation environments, CREB offers consistent returns well above the inflation rate.
• Real Asset Backing: Investments are secured by real estate properties, which historically appreciate over time and serve as a hedge against inflation.
• Liquidity and Flexibility: Investors can withdraw funds anytime, providing more flexibility compared to long-term fixed-income securities.

By combining high returns with real estate-backed security, CREB stands out as one of the best inflation-proof investment options available today.

Final Thoughts

Inflation can erode the value of cash and fixed-income investments, but diversifying your portfolio with inflation-resistant assets can help you preserve your wealth.

Investors looking for stable returns and inflation protection should consider a mix of I Bonds, REITs, commodities, pricing-power stocks, high-yield savings, short-term bonds, bank stocks, and Compound Real Estate Bonds (CREB).

By choosing the right inflation-proof investments, you can maintain purchasing power, reduce risk, and build long-term financial security even in an inflationary environment.

FAQs

How do you measure inflation risk?
Inflation risk is measured by assessing the difference between nominal returns (the stated returns on an investment) and real returns (adjusted for inflation). Key indicators include the Consumer Price Index (CPI), Producer Price Index (PPI), and breakeven inflation rates from Treasury Inflation-Protected Securities (TIPS). Investors also analyze historical inflation trends and expected inflation rates to gauge potential risks.

How do you manage inflation risk?
Managing inflation risk involves diversifying investments into inflation-resistant assets such as I Bonds, Real Estate Investment Trusts (REITs), commodities, and stocks of companies with strong pricing power. Short-term bonds and high-yield savings accounts can provide stability, while Compound Real Estate Bonds (CREB) offer fixed income returns with real asset backing. Adjusting asset allocation based on inflationary trends is another key strategy.

What is another name for inflation risk?
Inflation risk is also known as purchasing power risk because it refers to the potential loss of purchasing power due to rising prices, which can erode the real value of money and fixed-income investments.