Inflation hedge

Inflation hedge is an asset, contract or strategy that aims to preserve purchasing power when the general price level rises (that is, inflation). Definitions differ. Research separates expected inflation, which may already be priced, from unexpected inflation which is an unanticipated change. The effectiveness of any hedge depends on horizon and regime. Over twelve-month horizons some assets react to an inflation surprise, while over multi-year horizons those relationships can weaken or reverse as policy and the macroeconomy adjust. No single asset class provides a permanent hedge against unexpected inflation. Instruments that link cash flows to a consumer price index and market-based measures of inflation compensation address specific risks, although realised outcomes depend on index choice, publication lags, liquidity and risk premia, taxation and implementation costs.

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