Inflation Hedge Question - is there a way to "go long" the CPI?

Discussion in 'Economics' started by bettles, Apr 26, 2009.

  1. bettles


    I have about 15 years left until retirement and have a fairly large sum of money saved up so far, both in IRA accounts and outside them. My concern is that I will not be able to keep up with inflation, and that this money will have significantly less purchasing power by the time I retire. Is there any type of investment strategy that would let me totally hedge against inflation?

    I know people often say to buy commodities such as gold or energy as an inflation hedge. However, I see that the price of gold was close to $800 an ounce as far back as 1980, and today it is only around $900 an ounce. Meanwhile, the price of most things (rent, cars, utilities, groceries, etc.) has trippled. Likewise, oil first hit $50 a barrel back in 2004, but is under $50 a barrel currently. Meanwhile, the price of most things I buy has increased at least 15% over that same 5-year period.

    Ideally, there would be some sort of futures contract that mirrors the CPI. So for every $1000 I was trying to protect for inflation, I would buy $1000 worth of futures contracts and hold them long term (I realize that the CPI underestimates inflation, but I could always buy say $1500 or $2000 worth for every $1000 I was trying to protect).

    With such a hedge, I would be neutral about inflation. In the (very unlikely unlikely in my opinion) event that the CPI was ever negative for a year, I would be willing to accept that loss (as long as the money returned if the CPI rose back to its previous value).

    Does any such type of contract exist, or can anyone provide recommendations as to how to approximate it?


  3. Directly for an individual is unwieldy, considering how less liquid the secondary markets are for TIPS. The best route is TIPS mutual funds for individuals.
  4. bettles


    Thanks for the replies regarding TIPS. However, it sounds like TIPS would tie up the money I am trying to protect. I'm looking for something to hedge against inflation, while still allowing me to continue investing my money in other things. When an airline or trucking company wants to hedge against rising fuel prices, they buy oil futures. They do not have to put up the dollar value for the futures they are buying, only a small portion of it. Thus they are free to continue to invest their money in their business meanwhile. I'm looking for something similar.

    Also without leverage (which is the case for TIPS if I am understanding correctly) I can't fully hedge even if I was willing to tie up all my money in the TIPS since "official" estimates are likely to significantly underestimate inflation. Would there be such a thing as "futures" on TIPS? Or at least some type of long-term option (LEAP) that would allow me to hedge without tying up all my money?

  5. You should be able to buy TIPs on leverage with a broker. IB lets you do it 16:1 on the long maturity. I haven't held TIPs there, but have done this with long maturity treasuries (which actually possess a lot more duration risk than TIPs).

    So the leverage/capital-tieup issue is not an issue.

    If you don't trust government statistics solely, diversify into other inflation hedged investments: TIPs, gold bars, some oil barrels and/or oil & gas producer stocks, and maybe some real estate that gives you rent (which is a decent sized component of CPI).

    TIPs are nice though because in the event you are wrong about inflation, you still get back par in the off chance we have a few more years of deflation. They are essentially a muted option on inflation. You forego a little cashflow vs. vanilla treasuries in exchange for this benefit.
  6. ETF's:
    PowerShares DB Agriculture Fund
  7. I recommend you put at least 20% of your money into purchasing ETFs

    Commodity ETFs:

    RJA [ The top holdings include: wheat (20.1%), corn (13.6%), cotton (11.6%), and soybeans (8.6%), Live Cattle (5.7%), Sugar (5.7%), Bean Oil (5.7%), Coffee (5.7%) ]

    REITs ETFs:

    Dividend ETFs:

    and you don't want to forget Index ETFs
  8. Reits are a terrible idea. Get asolutely destroyed during bouts of deflation. Not a hedge at all. Basically a pyramid scheme.
  9. I stated REITs ETFs not REITs

    my bet is on inflation, in the worst possible form, where incomes don't increase yet the cost of basic needs like shelter and food increase. Since most americans won't be able to purchase homes anymore, they can only rent, driving rents even higher, REITs make more money when the rent to purchase ratio increases, which is what's happening now, all the signs of inflation are there, just waiting to happen, america is not japan, in no way, shape or form, nor is it the 1930s
  10. Don't see how your conclusion is consistent with the premise. If incomes aren't rising, a higher cost of housing is unsupportable regardless if it's a mortgage payment or rent.
    #10     Apr 26, 2009