If inflation is persistently above expectations, there's no single asset class that reliably protects purchasing power in every environment. Different inflation regimes favor different assets, so diversification tends to work better than making one large bet.
Here's how the main options compare:
| Asset | Strengths | Weaknesses | Best for |
|---|
| TIPS | Direct inflation adjustment of principal; relatively low risk | Sensitive to changes in real interest rates; can lag if inflation expectations are already priced in | Protecting purchasing power for conservative investors |
| Commodities | Often perform well during inflation shocks, especially energy | Highly volatile; no cash flow; long periods of underperformance | Short-term inflation surprises |
| Real assets (REITs, infrastructure, farmland, timber) | Some can raise prices with inflation and produce income | Sensitive to financing costs and economic slowdowns | Long-term inflation protection |
| Equities with pricing power | Can grow earnings faster than inflation over time | Stocks can still fall during inflation-driven rate hikes | Long investment horizons |
My preferred order
For someone investing over decades, I'd generally think about inflation protection in this order:
- Broad global equities remain the primary engine of real wealth.
- Companies with durable pricing power provide one of the best long-term inflation hedges.
- TIPS help stabilize purchasing power for the fixed-income portion.
- Real assets add diversification.
- Commodities are more tactical than strategic.
Pricing power matters
Inflation isn't just about rising costs—it's about whether businesses can pass those costs on.
Characteristics of companies with pricing power include:
- Strong brands
- Mission-critical software
- Dominant market share
- High switching costs
- Low capital intensity
- Recurring revenue
Historically, sectors such as healthcare, consumer staples, software, and certain industrial businesses have often held margins better than commodity producers during sustained inflation.
How much allocation?
There's no universal answer, but here are reasonable starting points.
Conservative investor
- 35–50% equities
- 20–40% TIPS
- 10–20% nominal bonds
- 5–10% real assets
- 0–5% commodities
Balanced investor
- 60% equities
- 15–20% TIPS
- 10–15% nominal bonds
- 10–15% real assets
- 0–5% commodities
Growth investor
- 80–90% equities
- 5–10% TIPS
- 5–10% real assets
- Little or no dedicated commodities
Why not hold a lot of commodities?
Commodities tend to be excellent during inflation surprises, but less compelling as long-term holdings because they:
- produce no earnings or dividends,
- can be extremely volatile,
- often underperform stocks over long periods.
Many institutional portfolios keep commodities in roughly the 3–10% range rather than making them a core allocation.
A practical approach
If your concern is "inflation keeps surprising to the upside," a diversified inflation-aware portfolio might look something like:
- 65% diversified global equities (with an emphasis on quality and pricing power)
- 15% TIPS
- 10% infrastructure/REITs or other real assets
- 5% commodities
- 5% cash or short-duration bonds
This mix aims to balance protection against unexpected inflation while still maintaining strong long-term growth potential.
One additional point: if inflation remains elevated because of strong economic growth, equities often outperform commodities over the long run. If inflation is driven by supply shocks (such as energy disruptions), commodities and TIPS generally provide better protection. That's another reason many investors prefer combining these assets rather than relying on just one.
