How to Invest During High Inflation: A Practical Guide

Inflation is the quiet tax. It doesn't show up as a line item on your brokerage statement, but it erodes the real value of every dollar you hold — including dollars "safely" sitting in a savings account or short-term bond fund.

During the 2021–2023 inflation surge in the United States, CPI peaked at around 9.1% year-over-year in June 2022, the highest reading since November 1981. Anyone who owned long-duration bonds or high-multiple growth stocks during that period felt the pain acutely. Meanwhile, commodities, value stocks, and certain real asset categories significantly outperformed.

This guide walks through the asset classes that have historically done well during high inflation — and more importantly, why they work — so you can build a more resilient portfolio the next time inflation flares.

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Why Inflation Destroys Certain Investments

Before getting to what works, it helps to understand the mechanism of inflation's damage.

Fixed-income bonds are the clearest victim. When you buy a bond paying 3% annually and inflation runs at 6%, your real return is -3%. The coupon payments don't adjust. Long-duration bonds — those with maturities of 10 years or more — are especially vulnerable because their future cash flows are being discounted at a higher rate, driving down their present value.

Cash and savings accounts lose purchasing power if the yield doesn't keep pace with inflation. Even "high-yield" savings accounts rarely match actual inflation rates.

High-multiple growth stocks are hurt because their valuations depend heavily on earnings expected far into the future. When inflation pushes interest rates up, those future earnings get discounted more aggressively, compressing valuations. This is why growth stocks sold off sharply in 2022 while the Federal Reserve was raising rates.

So what should you own instead?

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Treasury Inflation-Protected Securities (TIPS)

If you want guaranteed inflation protection with minimal credit risk, TIPS are the most direct instrument available.

TIPS are U.S. government bonds whose principal value adjusts with the Consumer Price Index (CPI). When inflation rises, the principal increases, meaning your interest payments (calculated as a fixed percentage of principal) also rise. At maturity, you receive the adjusted principal or the original face value, whichever is higher.

When TIPS work best: During unexpected inflation — when CPI comes in above what was priced into nominal bonds. If inflation is already "expected," it may already be priced into TIPS yields.

How to access TIPS:

• Directly through TreasuryDirect.gov
• Via ETFs like iShares TIPS Bond ETF or Vanguard Short-Term Inflation-Protected Securities ETF
• Through bond mutual funds focused on inflation-linked securities

One nuance: short-duration TIPS tend to be better inflation hedges than long-duration ones. Long-duration TIPS still carry significant interest rate sensitivity that can offset inflation protection in a rising rate environment.

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Commodities: The Classic Inflation Hedge

Commodities — oil, natural gas, metals, agricultural products — often cause inflation, which is precisely why they tend to perform well during inflationary periods.

When the dollar loses purchasing power, it takes more dollars to buy a barrel of oil, a ton of copper, or a bushel of wheat. Commodity prices frequently rise faster than general inflation, especially when supply constraints are the root cause of the inflation in the first place (as was the case post-COVID with supply chain disruptions).

Historical context: During the high-inflation era of the 1970s, commodities were among the best-performing asset classes. The S&P Goldman Sachs Commodity Index significantly outperformed equities in inflation-heavy years of that decade.

How to access commodities:

• Commodity ETFs and ETNs tracking broad commodity indices (e.g., Invesco DB Commodity Index Tracking Fund, iPath Bloomberg Commodity Index)
• Energy stocks: Companies that produce oil, gas, and natural resources often benefit directly from rising commodity prices through expanded margins
• Agricultural REITs and farmland funds: Farmland has historically been an excellent inflation hedge because land values and crop prices tend to rise with inflation

The caveat: Commodities are volatile. They can boom during inflation and crash when global growth slows. Position sizing matters — commodities work best as a portfolio hedge rather than a core holding.

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Real Estate Investment Trusts (REITs)

Real estate has long been considered an inflation hedge for two reasons:

1. Property values tend to rise with inflation over time
2. Lease agreements — especially short-duration or annually renewable leases — can be renegotiated upward as inflation rises

Not all REITs are equal here. Short-lease or inflation-linked REITs perform better during inflationary periods than those with long-term fixed leases.

Best-performing REIT categories during inflation:

• Industrial and logistics REITs: Short lease terms; high demand from e-commerce drove rent growth well above inflation in recent years
• Self-storage REITs: Month-to-month leases allow rapid repricing; storage costs typically track broader inflation
• Residential REITs: Rent levels respond to housing market conditions and can rise quickly in tight supply environments

Sector to watch more carefully: Office REITs and certain retail REITs may have longer-term leases that don't allow rapid repricing, limiting their inflation protection.

The Fed complication: When the Federal Reserve raises interest rates to combat inflation, REIT valuations face headwinds because REITs are often valued like yield instruments. There can be a painful transition period where REITs fall even as rent income grows. This is exactly what happened in 2022. Long-term investors who held through that dip saw recoveries as rents adjusted upward.

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Value Stocks Over Growth Stocks

This is one of the most durable patterns in inflationary environments: value outperforms growth.

Why?

Growth stock valuations are heavily weighted toward earnings expected years or even decades into the future. When inflation rises and interest rates follow, those distant future earnings are discounted at a higher rate, making them worth less today. A company trading at 50x earnings is far more sensitive to rising discount rates than a company trading at 12x earnings.

Value stocks — typically mature, profitable companies in traditional industries — tend to have:

• Lower price multiples, so less exposure to discount rate changes
• More immediate earnings, which reduces duration sensitivity
• Existing assets that appreciate in nominal terms during inflation

Historical evidence: During the inflationary 1970s, value stocks significantly outperformed growth stocks. In 2022, as inflation spiked and rates rose, the Russell 1000 Value Index fell roughly 8% for the year, while the Russell 1000 Growth Index fell over 29%.

The gap wasn't random — it was a direct consequence of how rising rates affect high-multiple valuations.

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Pricing Power as an Inflation Moat

Whether you're evaluating individual companies or sectors, one of the most important questions in an inflationary environment is: can this company raise its prices?

Businesses with strong pricing power can pass input cost increases on to customers without losing significant volume. This preserves margins even as wages, raw materials, and logistics costs rise.

Indicators of strong pricing power:

• High brand loyalty and low price sensitivity among customers
• Essential or necessity-type products (food, pharmaceuticals, basic utilities)
• Dominant market position with limited direct competition
• High switching costs or proprietary technology

Sectors historically associated with pricing power:

• Consumer staples (food and beverage, household products)
• Healthcare, particularly pharmaceutical manufacturers
• Defense contractors with cost-plus government contracts
• Software companies with deeply embedded enterprise products

Sectors that struggle with pricing power:

• Commodity-like manufacturers competing purely on price
• Retailers squeezed between rising supplier costs and price-sensitive consumers
• Airlines and transportation companies with high fixed costs and elastic demand

When building a portfolio for an inflationary environment, prioritize businesses that can protect margins — not just companies in "inflation sectors" that happen to be in vogue.

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Historical Inflation-Adjusted Returns by Asset Class

Looking at longer historical periods gives a sense of how different assets have fared relative to inflation:

Equities (broad market): Over multi-decade periods, equities have historically delivered real returns of roughly 6–7% annually above inflation. However, during high inflationary episodes specifically, stocks have been mixed — they can hold up if corporate earnings grow with inflation, but they struggle when rate hikes compress valuations.

Long-term government bonds: Real returns during high-inflation decades have often been negative. The 1970s were devastating for bond investors. The 2022 bond market delivered one of its worst annual performances in history.

Gold: Often cited as an inflation hedge, gold's track record is actually mixed over shorter horizons. It performed well in the 1970s but did little during the inflation spike of the 1980s. It tends to work better as a currency debasement hedge than a strict CPI hedge.

Real estate and commodities: Both have shown positive real returns during inflationary periods in most historical studies, though with significant volatility.

TIPS: By design, TIPS preserve purchasing power on the principal, making them the most reliable real-return instrument — though expected real yields can still be low.

The practical implication for investors: diversification across real assets, inflation-linked bonds, and pricing-power equities is more resilient than any single "inflation trade."

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Building Your Inflation-Resilient Portfolio

You don't need to overhaul your entire allocation to hedge against inflation. A few targeted adjustments can meaningfully reduce your portfolio's inflation sensitivity:

1. Shorten bond duration. Replace long-term bonds with short-term or floating-rate alternatives that reprice quickly.
2. Add TIPS exposure. Even a modest allocation helps anchor real returns during unexpected CPI surges.
3. Include commodity or natural resource exposure. A 5–10% allocation to broad commodities has historically improved risk-adjusted returns during inflationary regimes.
4. Tilt toward value over growth. This isn't just an inflation play — it's generally a sound long-term discipline that happens to pay off especially well when rates rise.
5. Prioritize companies with demonstrated pricing power. Look at gross margin trends over multiple years to identify businesses that can protect profitability.

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Final Thoughts

Inflation isn't just an economic phenomenon — it's a portfolio stress test. The investments you own during high inflation can mean the difference between growing real wealth and silently watching your purchasing power erode.

The core principles hold across market cycles: own real assets, favor shorter-duration instruments, prioritize businesses that can pass costs on to customers, and don't let nominal gains fool you if inflation is running hot.

Ready to start identifying companies with the financial characteristics that hold up under inflation pressure? valueofstock.com makes it easy to screen for margin stability, balance sheet strength, and value metrics — the building blocks of an inflation-resilient portfolio.