Myth Busting: Equities are an Inflation Hedge

Nominally yes, real no.

July 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Equities generated attractive nominal returns across all inflation regimes
  • However, real returns were zero when inflation was above 10%
  • Energy and materials performed best, consumer-facing sectors worst


“I came of age and studied economics in the 1970s and I remember what that terrible period was like,” U.S. Treasury Secretary Janet Yellen told a U.S. House subcommittee in May 2021. “No one wants to see that happen again.”

Inflation has dominated investing conversations in 2021. Many countries have rebounded strongly from the COVID-19 crisis and are experiencing significantly higher-than-expected inflation. The annual inflation rate in the United States jumped to 5% in May 2021, the highest level since August 2008.

While inflation is an evergreen topic for investors, ever since central banks rolled out their aggressive monetary policies during the global financial crisis, its prominence has grown. Though inflation has been trending downward since the 1980s, all that money printing has galvanized the inflation hawks. Some have even warned about potential hyperinflation reminiscent of that seen in the Weimar Republic of the 1920s (read Myth-Busting: Money Printing Must Create Inflation).

Whether the current higher readings are transitory or structural, how can investors hedge against inflation risk? According to a recent survey of quantitative investors at a JPMorgan conference, 47% of respondents believe commodities are the most effective security against inflation, followed by equities (27%), rate products and Treasury inflation-protected securities (TIPS, 10%), and other instruments (17%).