Inflation continues to prove a formidable adversary for the American economy, leaving financial markets searching for reliable hedges as price pressures stubbornly refuse to recede to the Federal Reserve’s target.
According to data released for September, the Consumer Price Index (CPI) hit 3.7%, serving as the latest indication that inflation remains a persistent economic reality rather than a temporary disruption. While this figure marks a dramatic decline from the historic 9.1% peak recorded in the summer of 2022, it remains comfortably and uncomfortably above the central bank’s mandated 2% target rate.
The September headline reading actually exceeded Wall Street expectations, which had centered on a 3.6% increase. Furthermore, the core CPI—a closely watched metric that strips out volatile food and energy costs—reached 2.6%, also topping forecasts. A significant portion of this latest upward momentum was fueled by rising energy prices. Compounding the picture, the Personal Consumption Expenditures (PCE) price index, which serves as the Federal Reserve’s preferred inflation gauge, remains elevated at a core rate of 3%.
This ongoing stickiness has begun to heavily influence consumer psychology. Data from the New York Federal Reserve’s Survey of Consumer Expectations revealed that the one-year inflation outlook climbed to 3.9% in September, marking its highest reading since May 2023. For everyday consumers and institutional investors alike, the creeping sense of unease is palpable, forcing market participants to re-evaluate how they protect their purchasing power.
For investors attempting to shield their portfolios from the erosion of inflation, finding effective shelters has proven to be a difficult balancing act. However, analysts point out that several avenues remain viable, ranging from long-term Treasury Inflation-Protected Securities (TIPS) to commodities, infrastructure, and alternative multi-asset strategies.
TIPS Deserve a Second Look Despite Rough Performance
Despite their explicit design to protect investors against rising prices, TIPS have struggled to deliver positive returns over the course of the year. The iShares TIPS Bond ETF, which tracks the ICE U.S. Treasury Inflation Linked Bond Index, has logged a total return of -1.16% year-to-date.
Like the broader bond market, TIPS have absorbed heavy losses amid a historic surge in interest rates. The benchmark 10-year Treasury note has climbed significantly throughout the year, recently spiking to 5.29%, hovering near levels not witnessed since 2002. Because bond prices and yields move inversely, the rapid ascent of interest rates dragged down the underlying market values of many existing TIPS funds.
Even so, the dramatic shift in yields has made TIPS considerably more attractive to forward-looking investors. The 10-year TIPS yield currently sits at roughly 2.9%, marking a sharp increase from the 1.9% level observed earlier in the year.
"Given where rates are, it’s getting interesting," observes Jason Draho, head of asset allocation Americas at UBS Global Wealth Management.
To understand why TIPS are drawing renewed attention, it helps to examine how they function mechanically. TIPS pay a fixed coupon, or interest rate, but as inflation climbs, the principal value of the bond is adjusted upward. These adjustments are calculated using changes in the non-seasonally adjusted CPI for All Urban Consumers, applied with a standard three-month lag.
The fundamental advantage is that TIPS investors earn their coupon interest on a progressively higher principal value over time, providing a direct structural defense that traditional Treasury bonds simply cannot match.
The poor performance of TIPS this year is not a reflection of surging inflation expectations. Instead, nearly the entire increase in yields has been driven by rising real yields—calculated as the nominal yield minus expected inflation. Real yields have pushed higher due to broader macroeconomic factors, including robust economic growth and a stubbornly high U.S. fiscal deficit hovering around 6% of gross domestic product, which necessitates heavy government borrowing.
If nominal interest rates were climbing strictly in response to escalating inflation, the total return on TIPS—which combines both yield and price performance—would be holding up quite well, according to R.J. Gallo, chief investment officer of global fixed income at Federated Hermes. Unfortunately, that has not been the script this year.
"TIPS have produced losses in total return because their income accruals have been insufficient to offset the price decline produced by the rising underlying real yields," Gallo explains.
Furthermore, TIPS maturing in a decade or longer carry significant duration risk, making them acutely sensitive to interest rate fluctuations. Draho notes that purchasing longer-maturity TIPS requires investors to make a definitive bet that interest rates have peaked. "You’re making a big call on rates not rising any further if you buy TIPS, especially longer maturities of 10-year plus," he warns.
The bull case for these long-term instruments rests on the possibility that inflation cools faster than the broader market anticipates. While current short-term Treasury yields suggest the market does not expect a rapid descent, a meaningful easing of inflation next year—an outcome Draho anticipates—would likely cause the yield curve to adjust downward, benefiting existing holders.
Investors seeking to manage duration risk can bypass broad bond funds by purchasing individual TIPS directly, thereby avoiding the necessity of maintaining a benchmark-consistent duration. For instance, individuals can construct a customized TIPS bond ladder featuring varying maturities pegged directly to their specific income requirements over the coming decade.
While holding a TIPS to maturity exposes an investor to interim price volatility, the security guarantees the return of either the original principal or the inflation-adjusted principal, whichever is higher, when the bond finally matures.
For those wary of long-duration volatility, short-term TIPS offer enhanced protection against rate increases while presenting compelling yields, according to Greg Sharenow, a portfolio manager at PIMCO.
"While as a firm, our view is that inflation will ultimately come down, that view keeps on being pushed out as real world events unfold," Sharenow notes. "We’ve seen over and over again the last five to seven years—where we’re now in our third supply shock—that you end up actually underpricing versus realized inflation."
Investors looking for short-term exposure can choose from several specialized funds, including the Vanguard Short-Term Inflation-Protected Securities ETF, the iShares 0-5 Year TIPS Bond ETF, and the PIMCO 1-5 Year US TIPS Index ETF.
Stocks, Commodities, and Alternative Hedges
While TIPS remain a cornerstone of inflation defense, market strategists emphasize that they are far from the only tool available. Rick Rieder, BlackRock’s chief investment officer for global fixed income, advocates for a diversified, multi-pronged approach that incorporates equities, commodities, and alternative assets to weather volatile economic cycles.
"I’d start layering in more income, keep interest-rate exposure moderate, and then what a lot of people are doing is use things like alternatives to create more balance in a portfolio," Rieder says. "That makes a lot of sense to me."
For investors seeking comprehensive exposure through a single vehicle, broad inflation-protection mutual funds and exchange-traded funds offer diversified baskets of assets. Prominent examples include the State Street Multi-Asset Real Return ETF, the Fidelity Strategic Real Return Fund, and the PIMCO Inflation Response Multi-Asset Fund.
The PIMCO fund’s underlying portfolio holdings span a wide spectrum, including TIPS, commodities, physical gold, and real estate investment trusts (REITs).
"The idea is to have a number of different exposures so that we can have a more balanced return and not try to be so specific in getting the exact right asset class at any one moment," Sharenow explains, noting that the fund maintains its heaviest weighting in TIPS, followed closely by commodities.
Commodities offer a distinct advantage through their pricing "pass-throughs," which represent the capacity of businesses to seamlessly shift rising operational costs onto consumers via price increases—a mechanism that ultimately benefits investors during inflationary periods. In addition to commodities, the PIMCO fund allocates roughly 10% each to gold and REITs.
Draho similarly endorses commodities, drawing on long-term asset-allocation studies that encompass historical periods like the 1970s, when inflation rates were significantly higher than they are today. Over extended horizons, he notes, commodities can help reduce portfolio risk and enhance diversification. Their protective benefits historically prove most pronounced when inflation overshoots consensus expectations.
Rather than attempting to time the market by picking individual commodities, Draho recommends holding a broadly diversified basket that undergoes regular rebalancing. Assets like gold and oil tend to perform well under differing economic and monetary policy scenarios, making a diversified approach preferable to concentrated bets.
Investors seeking straightforward commodity exposure have several options, including the Invesco Optimum Yield Diversified Commodity Strategy ETF (PDBC) and the iShares S&P GSCI Commodity-Indexed Trust (GSG).
Another asset class drawing strong endorsements from strategists is infrastructure, which encompasses hard economic assets such as toll roads, ports, bridges, and utility networks. Companies operating within this space frequently function as toll collectors, generating long-term revenue streams governed by contracts that feature built-in inflation riders or automatic price adjustments.
Investors can gain targeted exposure to this sector through specialized exchange-traded funds, such as the iShares Global Infrastructure ETF (IGF) and the ProShares DJ Brookfield Global Infrastructure ETF (TOLZ).
While Draho stops short of sounding immediate alarms regarding an uncontrolled inflation spiral, he maintains that prudence dictates adding portfolio safeguards against the possibility of another upward leg in consumer prices.
"The risk now is there will be supply side shocks that could push up inflation again," he concludes.
