W<\/span>hat do we want? We want inflation protection, we want it now, and we want it, ideally, in a highly-reliable set-and-forget format please.<\/p>\n I\u2019m a passive investor<\/a> after all, and I\u2019ve been hunting for alternatives since the passive investor\u2019s choice of inflation insulation \u2013 a short-duration index-linked bond ETF \u2013 had a [checks glossary of terms]<\/em> \u2018mare during the post-Covid CPI blow-up.<\/p>\n The purpose of this article, then, is to run through the list of other potential antidotes to see how they actually performed when prices boiled over.<\/p>\n We\u2019ve previously looked at<\/a> the scale of defeat for short-duration index-linked bond funds, and also the so-so performance of the most obvious replacement \u2013 a DIY portfolio of individual index-linked gilts<\/a>.<\/p>\n Here\u2019s a quick refresher via a chart:<\/p>\n Data from JustETF<\/a>, Tradeweb<\/a> and ONS<\/a>. February 2025<\/p>\n As you can see, neither of our index-linked contenders actually kept up with inflation. Disappointing. \u00a0<\/p>\n Partly the problem was that inflation-linked bonds were saddled with negative yields going into the pandemic inflation. And partly that the subsequent rise in yields \u2013 from negative to positive \u2013 inflicted a substantial price hit.\u00a0<\/p>\n Today a portfolio of individual linkers looks a good inflation hedge<\/a> because they\u2019re on positive yields.\u00a0<\/p>\n But assembling such a portfolio<\/a> requires some work. For many, it seems like an arcane and fiddly task \u2013 like building your own microcomputer<\/a> in the 1970s and \u201980s.\u00a0<\/p>\n Isn\u2019t there a BBC Micro, ZX81, or failing that, a VIC-20 of inflation containment you can just buy off the shelf? By which I mean a fund full of assets that eat rising prices for breakfast?\u00a0<\/p>\n We\u2019ll answer that in the next six charts. They show how most assets that could be turned to as your chief inflation-tamer dealt with the money monster from October 2021 to year-end 2024.<\/p>\n Note: all returns in this article are GBP nominal, dividends reinvested.<\/em><\/p>\n How did cash do, as represented by money market funds<\/a>?<\/p>\n Data from Heriot-Watt\/ Institute and Faculty of Actuaries\/ESCoE British Government Securities Database<\/a> and ONS<\/a>. February 2025<\/p>\n Cash was comfortably trashed.<\/p>\n For comparison, the annualised returns are:<\/p>\n Money market rates were positive versus inflation in 2023 and 2024, but not enough to make up the lost ground. What\u2019s more, money markets have been a real-terms loser all the way back to 2009 (bar a 0.4% gain in 2015).<\/p>\n Cash is popular now. Rates are high and bonds burned<\/a> many investors. But money market funds have historically provided a flimsy inflation defence.<\/p>\n Gold had a stormer. In fact, without wishing to ruin the surprise gold was the best asset in our round-up. (Oh dear, I\u2019ve ruined the surprise!)<\/p>\n Data from The London Bullion Market Association<\/a> and ONS<\/a>. February 2025<\/p>\n Annualised returns:<\/p>\n Gold has a reputation as an inflation hedge. A distinction that\u2019s surely been burnished by its recent performance.<\/p>\n But gold<\/a> isn\u2019t really tethered to inflation.<\/p>\n Even the few years covered by the chart indicate it dances to a different tune. Inflation whips up in late 2021 and absolutely rages in 2022. However, we\u2019re firmly back in the realms of standard-issue 2.5% inflation by 2024.<\/p>\n Whereas gold is on fire in 2024, does merely okay in 2023, and registers a 0.1% real terms loss in 2022.<\/p>\n Overall, gold holders can be very happy with their choice this time, but its future reliability remains an enigma.<\/p>\n It\u2019s entirely plausible that gold is propped up in inflationary situations because many people believe it is an inflation hedge.<\/p>\n They take refuge in gold as inflation rates climb while bailing on asset classes that succumb to price pressure.<\/p>\n The problem is the lack of:<\/p>\n Gold at least seems to thrive during periods of great uncertainty \u2013 and inflationary shocks do contribute towards a general sense of systematic instability.<\/p>\n Raw materials are part of the very physics of inflation itself. Can they help us?<\/p>\n Data from Bloomberg<\/a> and ONS<\/a>. February 2025<\/p>\n Annualised return:<\/p>\n Commodities scored a draw \u2013 precisely matching the rise in headline rates over the period.<\/p>\n However, there\u2019s a canary in the coal mine relationship between commodities and high inflation.<\/p>\n Rising raw material costs feed inflation, which means that commodities prices have historically front-run UK CPI<\/a> by a year or so. If we zoom out to include commodities\u2019 28% gain in 2021, then we discover that the asset class did comfortably beat inflation after all.<\/p>\n There is also good evidence<\/a> that commodities have historically outperformed other asset classes when inflation flares up. I\u2019ll dig into this in more detail soon.<\/p>\n The other point worth making is that commodities are highly volatile and negatively correlated with equities and bonds. Rebalance sharp-ish when commodity prices spike and you may earn a juicy rebalancing bonus for your trouble.<\/p>\n The next chart seems to be saying: forget all the fancy stuff, just focus on pound-cost averaging<\/a> and keep your head:<\/p>\n Data from MSCI<\/a> and ONS<\/a>. February 2025<\/p>\n Annualised return:<\/p>\n Equities slipped below inflation\u2019s high-water mark in 2022 and 2023. Only to surface and rise like a continental crumple zone, once the price pressure subsided.<\/p>\n Historically equities have typically reacted to inflation like it\u2019s an essential vitamin. The right dose keeps stocks \u2013 and the rest of the economy \u2013 humming. But too much and financial weakness, nausea, vomiting, and cramps follow.<\/p>\n Still, equities have always recovered quickly once inflation has returned to reasonable levels. We saw that again this time.<\/p>\n Perhaps young, resilient accumulators should forget about hedging inflation and focus on outrunning it<\/a>.<\/p>\n Just for fun, here\u2019s everything piled into one uber bar-room brawl of a graph:<\/p>\n If your portfolio was this diversified then you could hardly have done much more. Here\u2019s the full rundown of annualised results, along with cumulative returns in brackets:<\/p>\n Personally-speaking, the recent price spiral has profoundly reshaped my portfolio<\/a>. I have since sold my linker fund and bought individual index-linked gilts, gold, and commodities instead.<\/p>\n Hopefully that means that \u2013 in tandem with a chunky equity allocation \u2013 my portfolio is better equipped to meet future inflationary bow waves.<\/p>\n Still, if you go to an anti-inflationary arms fair, you\u2019ll meet plenty of people willing to sell you on all manner of other solutions\u2026<\/p>\n Here\u2019s a selection of oft-cited inflation-busters, charted over the same period as before only this time in ETF form:<\/p>\n![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2025\/02\/Inflation-vs-individual-linkers-vs-linker-fund-v2-copy.png?resize=1829%2C1072&ssl=1\")
<\/a><\/p>\nInflation vs money market funds<\/h2>\n
![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2025\/02\/Cash-vs-inflation.png?resize=1024%2C614&ssl=1\")
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Inflation vs gold<\/h2>\n
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Inflation vs commodities<\/h2>\n
![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2025\/02\/Commodities-vs-inflation.png?resize=1537%2C917&ssl=1\")
<\/a><\/p>\nInflation vs World equities<\/h2>\n
![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2025\/02\/Equities-vs-inflation.png?resize=1537%2C917&ssl=1\")
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Inflation vs all-comers<\/h2>\n
![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2025\/02\/Inflation-vs-All-comers.png?resize=1024%2C606&ssl=1\")
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Inflation countermeasure or counterfeit?<\/h2>\n
![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2025\/02\/Inflation-contenders-v4.png?resize=1591%2C772&ssl=1\")
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