Defining Inflation and Why It Occurs - Part IV

7. Hedging Tools: TIPS, Commodities, Real Estate & Crypto

1. Treasury Inflation-Protected Securities

Treasury Inflation-Protected Securities (TIPS) are the only U.S. bonds whose principal is contractually linked to the Consumer Price Index (CPI). Twice a year, the Treasury recalculates the bond’s face value in line with CPI changes; coupon payments, though fixed in rate, are applied to this adjusted base, so both the interest and the amount redeemed at maturity rise with inflation^[33].

In 2025, real yields on 10-year TIPS briefly topped 2.3 %—their highest level since the early 2000s—because nominal Treasury yields stayed high while inflation expectations moderated^[34].

Investors should remember, however, that TIPS prices can still fall when real rates rise, and taxable investors may face “phantom income” because the CPI adjustment is taxed annually even though the inflation-linked principal is not paid out until maturity. Holding TIPS in tax-deferred accounts—or via ETFs that reinvest the adjustment—helps mute that drag. As a core inflation hedge, TIPS work best when inflation is persistent rather than a sudden spike, because the adjustment occurs with a lag that can be several months.

2. Commodities & Crypto Swings

Physical commodities—oil, metals, grains—and the indexes that bundle them, such as the S&P   GSCI, have historically delivered some of the strongest short-term protection when inflation jumps. During 2024, for example, the broad GSCI returned 12.8 % while U.S. CPI ran above 3 %, with petroleum up 21 % and gold setting fresh record highs^[35].

The linkage is intuitive: many consumer prices are directly driven by commodity inputs, so spot and futures prices react quickly to supply-demand shocks. In the crypto realm, claims that bitcoin is “digital gold” remain hotly debated.

A 2023 academic paper found BTC prices actually fall on inflation surprises^[36]; other analyses show correlations that vary by regime, weakening notably in 2021-23 when inflation was highest^[37]. In practice, commodities tend to respond within days, whereas crypto’s behavior looks more like a high-beta tech stock—useful for tactical trades, but unreliable as a dedicated hedge.

3. Real Estate’s Slow-Burn Shield

Real estate is often described as a “slow-burn” hedge: rents and property values adjust more gradually than commodity prices, yet over multi-year horizons they track inflation surprisingly well. Data from the NCREIF Property Index show a 0.94 correlation between U.S. commercial property values and CPI from 1977 to 2024^[38].

McKinsey’s review of seven high-inflation episodes found that rent escalators, CPI-linked leases, and cap-rate compression helped real estate outperform both stocks and bonds in real terms^[39].

The catch is liquidity and timing: transactions are chunky, and rising interest rates can erase some price gains by pushing cap rates higher. Investors can access the asset class through listed REITs or private funds, but should match their horizon to the longer re-pricing cycle—five to ten years is the sweet spot for inflation protection according to long-run studies.

8. Conclusion: Your 1-3 Year Inflation Defense Plan

1. Prioritise Liquidity Without Letting Cash Decay

A resilient short-term inflation strategy starts with deliberately sizing your liquid reserves so that they survive rising prices yet remain instantly accessible. Keep an emergency fund covering at least three to six months of essential expenses in a high-yield savings account—top online banks still pay around 4 % APY, far more than the 0.37 % national average^[40].

Funds that will be needed within the next 12 months can sit in three- or six-month Treasury bills or money-market funds that are now yielding above CPI, giving you government-backed safety while capturing rate hikes^[41].

For dollars you can lock up slightly longer, combine Series I Savings Bonds (annual purchase limit $10 000) with short-duration TIPS ETFs; both instruments adjust principal or yield with the Consumer Price Index, preserving purchasing power^[42]. By layering these vehicles, you insulate day-to-day cash from erosion while earning a real return that traditional checking or brokerage sweep accounts rarely match.

• 0 – 12 months: High-yield savings, T-bills, money-market funds
• 12 – 36 months: I Bonds, short-term TIPS ETFs, laddered CDs

2. Keep Asset Allocation Agile and Goal-Centric

Inflation rarely moves in a straight line, so your portfolio shouldn’t either. Review goals quarterly and rebalance tactically: shift two to four percentage points of core equity exposure toward sectors with pricing power—energy, industrials, and broad commodity producers historically beat CPI in high-inflation regimes^{Rowe Price: Hedging Inflation Risk" target="_blank" rel="noopener noreferrer">[43]}. At the same time, trim long-dated nominal bonds, which lose real value when prices spike, and replace them with a ladder of one- to three-year notes or defined-maturity bond ETFs that mature into cash you know you will need^[44].

Every update session should ask three questions: 1) Have near-term spending needs changed? 2) Does today’s CPI reading threaten my planned real return? 3) Do new tax-advantaged accounts—health-savings or 529 plans, for example—offer higher yields? By letting those answers drive incremental rebalancing rather than calendar rituals, you avoid emotional trades and keep the portfolio aligned with life events while inflation runs its course.

1. Audit goals and cash-flow forecasts every 90 days.
2. Rebalance if actual weights drift more than ±5 % from targets.
3. Automate contributions to inflation-protected or floating-rate assets.

References

1. [33] Investopedia – What Are TIPS?
2. [34] WSJ – Buying Inflation Protection
3. [35] S&P   Dow Jones Indices Blog – Commodities Deliver Returns
4. [36] Pinchuk (2023) – Bitcoin Does Not Hedge Inflation
5. [37] Forbes Digital Assets – Crypto & Inflation
6. [38] Plante Moran (2025) – Real Estate as an Inflation Hedge
7. [39] McKinsey (2023) – CRE & Inflation
8. [40] Forbes Advisor: How to Hedge Against Inflation
9. [41] MarketWatch: Handling Bond-Market Volatility
10. [42] TIME: Best Inflation Investments 2025
11. [43] T. Rowe Price: Hedging Inflation Risk
12. [44] MarketWatch: Handling Bond-Market Volatility