Why your inflation hedge protects against the wrong kind of inflation
- Robin Powell
- 57 minutes ago
- 9 min read
New research from a top-three finance journal shows that the assets investors buy to protect themselves against inflation, including shares, gold, property and commodities, only hedge against the kind of inflation that doesn't cost them very much. The slow, grinding sort that actually erodes purchasing power year after year? Nothing hedges that cheaply. The popular inflation hedge, it turns out, protects against the wrong kind of inflation.
When most people picture inflation, they picture the petrol pump and the energy bill. The numbers are big. The bulletins are louder. The political arguments about who is to blame practically write themselves. Energy inflation is the thunderstorm. Dramatic, sudden, hard to ignore.
But the inflation that actually wears down spending power is quieter than that. It happens at the supermarket checkout, at the dentist, in the rent statement, in the price of a pint at the pub and a haircut on the high street. It's the steady creep in the cost of almost everything that isn't a barrel of oil. In central bank jargon, that's core inflation. In everyday language, it's the damp that gets into the walls. You don't see it. You don't smell it. And then one day the paint starts to peel.
The two are not equal partners in your headline cost of living. Core items make up roughly 71 per cent of the headline consumer price index. Energy is only about 9 per cent. Energy is loud, though. Its quarterly standard deviation runs to nearly 20 per cent, against less than three per cent for core (Fang, Liu and Roussanov, 2026). That's why energy dominates the news. Storms always do.
It's also why most investors have been quietly mis-sold a solution. New research covering 56 years of data and eight asset classes finds that nearly every asset marketed as an inflation hedge, whether equities, gold, property funds or commodities, only protects against the energy component. Against the core component, the one that does the slow long-term damage, the same assets are not neutral. They're actively bruised.
The inflation hedge that hedges the wrong thing
Real assets are supposed to be the answer to rising prices. The trouble is they're answering a different question.
Take shares first. In the Fang, Liu and Roussanov analysis, equities have what asset pricing researchers call a 'core inflation beta' of minus 5.60. Beta, in this context, just means the size of the price response to a one-unit surprise in core inflation. A negative number means prices fall when core inflation surprises to the upside; a large number, in t-statistic terms (minus 3.69 in this case), means the effect is statistically robust. Stocks fall sharply when core inflation surprises to the upside. Against energy inflation, by contrast, stocks score plus 0.21, a modest, statistically marginal gain. Combine the two and you get a headline beta of minus 1.33 that isn't statistically significant. That insignificant number is the source of decades of confusion about whether equities hedge inflation. The honest answer is that they hedge one kind and are hurt by the other, and the two effects roughly cancel on paper while doing very different things to your portfolio.
REITs, the listed property funds many UK investors hold inside ISAs and SIPPs, tell the same story, only worse. Their core inflation beta is minus 6.54. Their energy beta is plus 0.31. Property has been sold for years as the natural shield against rising prices. The data say it hedges petrol shocks. It does not hedge the rent and the groceries.
What about commodities, the other classic real-asset bet? Commodity futures fare best against energy inflation, which makes intuitive sense. They're partly an energy basket. But even at their best they offer almost no protection against core inflation. Currencies and REITs sit in the same camp. Across the asset classes retail investors actually own, the pattern is consistent. Storm-proof windows everywhere. Damp-proofing nowhere.
The pattern is also remarkably stable. When the researchers split the sample into two periods (1963 to 1999, and 2000 to 2019), the core inflation betas barely move. The energy betas, by contrast, swing around dramatically. Stocks' energy beta flipped from minus 0.24 in the earlier period to plus 0.35 in the later one. So the comforting story you sometimes hear, that 'equities used to lose money during inflation but now they hedge it', is half right. They hedge the energy half. The other half hasn't budged.
The authors put it crisply. 'Stocks' often insignificant headline betas are largely an artefact of their energy betas, which vary over time but are strongly positive in recent decades, obscuring the robustly negative betas with respect to core inflation' (Fang, Liu and Roussanov, 2026, p. 704). Translation: the apparent ambiguity in the textbook is a statistical mirage. There is no ambiguity. There are two opposing forces being averaged into one misleading number.
Gold doesn't hedge the inflation that matters either
Of all the assets sold as an inflation shield, gold has the loudest fan club. The same paper, looking at gold specifically, finds its core inflation beta is indistinguishable from zero. The yellow metal hedges energy inflation and only energy inflation.
This is not a new claim from TEBI. It is, however, finally a well-supported one. Two earlier pieces have looked at this from different angles. Our October 2025 article on whether gold is a good investment showed gold fails as an inflation hedge over the horizons that actually matter to retirement investors. Our April 2026 follow-up on gold's inflation hedge failing in a crisis cited Baur's finding that inflation variables explain just two-to-five cent of gold's quarterly price movements across more than 50 years of data.
The Fang, Liu and Roussanov paper supplies the mechanism behind those empirical results. Gold responds to energy shocks. It does not respond to the slow grind of core inflation that's doing the actual damage to purchasing power. The most expensive umbrella in the shop is still just an umbrella. It doesn't fix the damp.
None of this is to deny that gold may have other useful properties. There's a separate, livelier debate about whether it acts as a crisis hedge during equity drawdowns. That's a different claim, and not the subject of this article.
Why core inflation is the one that costs you
So far the picture is unsettling but tidy. Assets sold as inflation hedges only hedge the small, volatile, dramatic part of inflation. The larger, persistent part, the part that actually erodes your standard of living, goes unhedged. The natural next question is: why? And why hasn't the industry fixed it?
The answer starts with the price of risk. Markets compensate investors for bearing risks that are uncomfortable to bear. In the Fang, Liu and Roussanov analysis, the price of core inflation risk is minus 1.07, with a t-statistic of minus 3.72. In plain English: holding an asset that loses value when core inflation surprises upward earns you roughly 1 per cent extra a year as compensation. The price of energy inflation risk, by contrast, is positive but statistically indistinguishable from zero. Markets don't pay you to hedge energy inflation, because energy inflation isn't a serious threat to long-run wealth. They do pay you, and pay you well, to bear core inflation risk. As the authors put it, 'hedging against core inflation is costly, while hedging against energy inflation is free or even rewarded' (Fang, Liu and Roussanov, 2026, p. 704).
Why does core inflation hurt so much more? The simplest answer is that it hits asset prices through several channels at once. Around 29 per cent of the effect on stocks runs through the short-term monetary policy channel. The Bank of England or the Federal Reserve raises rates, and discount rates rise with them. Another 16 per cent works through a medium-term channel. The remaining 55 per cent is not about central banks at all (Fang, Liu and Roussanov, 2026). Core inflation eats into corporate margins. It feeds into wage demands. It reshapes consumer behaviour in ways that don't reverse once the headlines move on. Even when investors correctly anticipate the central bank's response, core inflation surprises still significantly depress share prices. The damp keeps spreading regardless of who is shouting about it.
The deeper reason the industry hasn't fixed this is that fixing it isn't profitable. Energy inflation makes for a great marketing chart. It spikes visibly, and the things sold as hedges, whether commodity ETFs, mining stocks, gold funds or themed 'real asset' portfolios, spike alongside it. The backtests look heroic. Core inflation has no such pyrotechnics. Hedging it would mean accepting lower expected returns to insulate against a risk that nobody else wants to bear, and most retail products are not in the business of selling boring underperformance. As Roussanov himself noted in a 2021 Wharton interview, 'Post-Covid, core inflation or prices of goods have been going up across wide swathes of the economy, not just energy costs.' When both components surged together in 2021 and 2022, the conventional inflation hedge appeared to work. Then the energy component retreated. The core component did not. The hedges stopped doing what they had seemed to do.
A note on the data. The formal analysis ends in late 2019, so the 2021 to 2023 episode is qualitative, not statistical. But the qualitative story fits the formal one too neatly to ignore.
What actually works against the inflation that matters
The honest answer no one wants to print on the front of a fund factsheet is this: there is no cheap, ready-to-buy hedge against core inflation through conventional assets. Acknowledging that is uncomfortable. It's also liberating, because it means you can stop paying for products that have been missing their target for years.
A few things do help, in different ways.
Inflation-linked bonds, TIPS in the US and index-linked gilts in the UK, are not statistical hedges in the way the academic papers use the word. They're mechanical adjustments. The coupon and principal move with headline CPI by design, so you don't have to hope a correlation behaves itself. They have real limitations: they track headline CPI rather than core specifically, and real yields can be negative for long stretches. But they do exactly what they say on the tin, which is more than most of the alternatives can claim.
A diversified, low-cost global equity portfolio has historically delivered real returns that comfortably outpace inflation over the long horizons that matter to most investors. That isn't inflation hedging in the textbook sense. It's participating in productive economic growth that, over time, grows faster than prices rise. Shares don't protect you from inflation. They grow despite it, provided you give them long enough.
Cash buffers do something different again. Holding one to three years of known spending in cash or near-cash means you don't have to sell risk assets at the wrong moment when prices are rising. The protection is behavioural rather than financial. It buys you the time not to panic.
What to stop doing is just as important. Stop buying tactical inflation hedge products on the basis that they protect against inflation in general. They don't. They protect against the small, volatile, well-priced component, and they often charge handsomely for the privilege. Every pound spent on a thematic real-asset fund is a pound not working inside a diversified portfolio designed to capture long-run real returns.
The damp that matters
The inflation that costs you the most is the inflation you barely notice. It isn't the petrol pump. It's the supermarket checkout, the rent statement, the price of a coffee that used to cost half what it does now. Core inflation is the damp in the walls. By the time the paint peels, the structural work is already done.
The investment industry sold you storm windows. Now you know. The right response isn't another product with a clever ticker. It's the same boring, evidence-based discipline that works for every other investing problem. Diversify. Keep costs low. Hold linkers for the mechanical inflation adjustment they actually deliver. And stop buying umbrellas every time the petrol price spikes.
Stop trying to insure against the uninsurable, and you free up the money and the attention for the strategy that does the real work.
Resources
Fang, X., Liu, Y., & Roussanov, N. (2026). Getting to the core: Inflation risks within and across asset classes. The Review of Financial Studies, 39(3), 702–743.
Where to go from here
If this article has made you rethink the products in your portfolio that were sold as inflation protection, the wider question of building a plan that survives both inflation and your own behaviour is the subject of How to Fund the Life You Want by Robin Powell and Jonathan Hollow. The second edition, published by Bloomsbury, is written for UK readers and is available on Amazon.
If you'd rather talk to someone in person, our Find an adviser directory lists firms that have publicly committed to evidence-based investing.