{"id":122469,"date":"2022-02-04T12:47:00","date_gmt":"2022-02-04T17:47:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=122469"},"modified":"2023-02-10T13:31:48","modified_gmt":"2023-02-10T18:31:48","slug":"can-we-really-hedge-inflation","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/can-we-really-hedge-inflation\/","title":{"rendered":"Can We Really Hedge Inflation?"},"content":{"rendered":"\n<p>Inflation is certainly a topic on everyone\u2019s mind lately, and for good reason.&nbsp; US consumers haven\u2019t seen prices rise this fast since the early 1980\u2019s, which was before most current investors were active in the market.&nbsp; At that time, Paul Volcker\u2019s Federal Reserve was taking active measures to calm inflationary pressures; at present, the Powell-led Fed is still talking about raising rates and reducing its bond purchases, but rate hikes are only theoretical and <a href=\"\/campus\/traders-insight\/securities\/fixed-income\/taper-what-taper\/\">the taper is proceeding more slowly than they would have us believe<\/a>.<sup>[i]<\/sup><\/p>\n\n\n\n<p>For many of us, oil prices are the clearest harbinger of inflation.&nbsp; We see gas prices posted whenever we drive, and most of us still need to fill our cars regularly.&nbsp; A chart like this would certainly fit with the inflationary theme:<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-1-year-graph-front-month-nymex-crude-oil-futures\"><strong>1-Year Graph, Front Month NYMEX Crude Oil Futures<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"812\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/oil-1100x812.png\" alt=\"1-Year Graph, Front Month NYMEX Crude Oil Futures\" class=\"wp-image-122473 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/oil-1100x812.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/oil-700x517.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/oil-300x221.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/oil-768x567.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/oil-1536x1134.png 1536w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/oil.png 1756w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/812;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p>To be fair, oil is a volatile commodity, and is far less critical to the economy than it was in Mr. Volcker\u2019s day, but it remains a key input to a wide range of unfinished goods and services.&nbsp; A rise like this definitely stings.<\/p>\n\n\n\n<p>The inflationary theme is certainly picked up by other measures.&nbsp; The graph below shows two of them, the Consumer Price Index (CPI) and the Commodity Research Bureau BLS Spot Index (CRB).&nbsp; The CPI is updated monthly and contains a broad range of inputs, while CRB is continually calculated by using popularly traded commodities, but we see they generally tracked each other well over the past two years:<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"2-year-chart-crb-index-white-left-scale-vs-cpi-blue-right-scale\"><strong>2-Year Chart, CRB Index (white, left scale) vs. CPI (blue, right scale)<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"465\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CPI-CRB-1100x465.png\" alt=\"2-Year Chart, CRB Index (white, left scale) vs. CPI (blue, right scale)\" class=\"wp-image-122474 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CPI-CRB-1100x465.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CPI-CRB-700x296.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CPI-CRB-300x127.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CPI-CRB-768x324.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CPI-CRB-1536x649.png 1536w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CPI-CRB.png 1918w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/465;\" \/><\/figure>\n\n\n\n<p><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p>The problem is that neither index displayed above is easily hedged.&nbsp; There are no futures on either index, and attempts at ETFs on the CRB have generally failed.&nbsp; One could buy TIPs, Treasury Inflation Protected securities, which are liquid and have active ETFs, but many critics complain that their prices are distorted by the Fed\u2019s bond buying.<sup>[ii]<\/sup>&nbsp;<\/p>\n\n\n\n<p>The classic inflation hedge has historically been gold, but it has fallen short of that goal recently, as the graph below shows:<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"1-year-graph-spot-gold-in-us-dollars-usgold\"><strong>1-Year Graph, Spot Gold in US Dollars (USGOLD)<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"812\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/gold-1100x812.png\" alt=\"1-Year Graph, Spot Gold in US Dollars (USGOLD)\" class=\"wp-image-122476 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/gold-1100x812.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/gold-700x517.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/gold-300x221.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/gold-768x567.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/gold-1536x1134.png 1536w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/gold.png 1756w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/812;\" \/><\/figure>\n\n\n\n<p><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p>Let\u2019s be blunt.&nbsp; If you bought gold as an inflation hedge, it hasn\u2019t worked.&nbsp; This is something we <a href=\"\/campus\/traders-insight\/securities\/commodities\/gold-digital-gold-and-inflation\/\">addressed last spring<\/a>, and the relationship hasn\u2019t improved much since then.&nbsp; Gold often acts more like an \u201canti-dollar\u201d rather than an inflation hedge, and this is one of those periods.&nbsp;<\/p>\n\n\n\n<p>Undoubtedly some of you are thinking \u201cwhat about cryptocurrencies?\u201d&nbsp; Um, no.&nbsp; They rose early last year when inflation began to rise, but that was more about their adoption as a speculative investment than as a hedge.&nbsp; Since then, they have been of little value as a hedge, as shown below:<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"2-year-chart-crb-index-white-far-left-scale-vs-cpi-blue-right-scale-bitcoin-red-near-left-scale-and-spot-gold-purple-far-right-scale\"><strong>2-Year Chart, CRB Index (white, far left scale) vs. CPI (blue, right scale), Bitcoin (red, near left scale) and Spot Gold (purple, far right scale)<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"464\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CRB-CPI-Gold-Bitcoin-1100x464.png\" alt=\"2-Year Chart, CRB Index (white, far left scale) vs. CPI (blue, right scale), Bitcoin (red, near left scale) and Spot Gold (purple, far right scale)\" class=\"wp-image-122477 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CRB-CPI-Gold-Bitcoin-1100x464.png 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CRB-CPI-Gold-Bitcoin-700x295.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CRB-CPI-Gold-Bitcoin-300x126.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CRB-CPI-Gold-Bitcoin-768x324.png 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CRB-CPI-Gold-Bitcoin-1536x647.png 1536w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2022\/02\/CRB-CPI-Gold-Bitcoin.png 1915w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/464;\" \/><\/figure>\n\n\n\n<p>Sorry, but there are no easy answers when it comes to hedging inflation.&nbsp; Furthermore, the more difficult answers generally involve items that are less liquid, longer-term investments.&nbsp; For now the best answer is to manage your risk and keep your exposures in check.<\/p>\n\n\n\n<p>&#8212;<\/p>\n\n\n\n<p>[i] The holdings of securities on the Fed\u2019s balance sheet was $8,391,301 million <a href=\"https:\/\/www.federalreserve.gov\/releases\/h41\/current\/\">as of February 2nd<\/a>.\u00a0 <a href=\"https:\/\/www.federalreserve.gov\/releases\/h41\/20220106\/\">On January 6<sup>th<\/sup><\/a>, that figure was $8,279,124 million.\u00a0 That shows a rise of over $112 billion, which is well more than what many would expect based on the announced rate of tapering.\u00a0<\/p>\n\n\n\n<p>[ii] There are Series I Savings Bonds, issued by the US Treasury that are inflation-linked and <a href=\"https:\/\/www.treasurydirect.gov\/indiv\/products\/prod_ibonds_glance.htm\">currently yielding 7.12%<\/a>.&nbsp; But there are strict limitations on purchase size and penalties for early redemption.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Inflation is certainly a topic on everyone\u2019s mind lately, and for good reason.  US consumers haven\u2019t seen prices rise this fast since the early 1980\u2019s.<\/p>\n","protected":false},"author":4,"featured_media":107381,"comment_status":"closed","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21,14,15,17,14700,18,6,8,9,26,3],"tags":[1056,2579,570],"contributors-categories":[13576],"class_list":{"0":"post-122469","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-commodities","8":"category-etfs","9":"category-fixed-income","10":"category-futures","11":"category-ibkr-market-insights","12":"category-macro","13":"category-north-america","14":"category-region","15":"category-securities","16":"category-text-articles","17":"category-traders-insight","18":"tag-crude-oil","19":"tag-hedge","20":"tag-inflation","21":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.4) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Can We Really Hedge Inflation? | Traders&#039; Insight<\/title>\n<meta name=\"description\" content=\"Inflation is certainly a topic on everyone\u2019s mind lately, and for good reason. 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