I'm not going to speculate on which way inflation is going. These days it's very difficult to forecast anything. But if you think we are in for some high inflation, then I want to offer some strategies for protecting your wealth. I've been studying up on inflation hedges and I have found that, over the long-run, stocks offer about the best protection there is. But not all stocks are equally good hedges, and they also are not a good short-term strategy. Probably gold, silver, and commodities are better short-term strategies.But for investors, here are some tips.
1) Think long-run. Not a month, a quarter or a year. More like 5-year horizons. You might find that on the next CPI announcement day, if it is unexpectedly high, your stocks will move down. Fight the urge to sell! You will make it up over time. It's not a one-to-one hedge, though. For every 1% increase in inflation, you get about 0.5% more returns on your stocks over a 5-year window.
2) Allocate assets to non-cyclical companies. Hold more of your wealth in consumer stables. Industries like Apparel and Food and Beverage hold up better against inflation than producer goods industries.
3) Hold lower-beta stocks. No sense in doubling up on risk. If you are worried about maintaining your wealth in inflationary periods, you are better off holding less volatile stocks.
4) Diversify internationally. In the U.S. the equities don't have as much inflation hedge as in countries where people are accustomed to high inflation. Holdings in Israel can be particularly advantageous since everything there is in real terms, so by definition you keep up to inflation. Emerging markets also appear to cover for inflation spillover from the U.S., so you get a double-hedge.
5) Hold net debtors. In periods of unexpected inflation, the real value of debt goes down, leaving more of the firm for the equity holders. This isn't that big of a deal, though.
Do all of these things and you'll have a better chance to maintain your wealth in inflationary times. Above all, though, do not settle for risk-free returns that are below inflation. Then your real returns are negative, and that's bad news all 'round.