how inflation hedging works
inflation hedging can help protect the value of an investment certain investments might seem to provide a decent return but when inflation is factored in they can be sold at a loss for example if you invest in a stock that gives a 5 return but inflation is 6 you are losing that 1 assets that are considered an inflation hedge could be self fulfilling investors flock to them which keeps their values high even though the intrinsic value may be much lower gold is widely considered an inflationary hedge because its price in u s dollars is variable for example if the dollar loses value from the effects of inflation gold tends to become more expensive so an owner of gold is protected or hedged against a falling dollar because as inflation rises and erodes the value of the dollar the cost of every ounce of gold in dollars will rise as a result so the investor is compensated for this inflation with more dollars for each ounce of gold a real world example of inflation hedgingcompanies sometimes engage in inflation hedging to keep their operating costs low one of the most famous examples is delta air lines purchasing an oil refinery from conocophillips in 2012 to offset the risk of higher jet fuel prices to the extent that airlines try to hedge their fuel costs they typically do so in the crude oil market delta felt they could produce jet fuel themselves at a lower cost than buying it on the market and in this way directly hedged against jet fuel price inflation at the time delta estimated that it would reduce its annual fuel expense by 300 million limitations of inflation hedginginflation hedging has its limits and at times can be volatile for example delta has not consistently made money from its refinery in the years since it was purchased limiting the effectiveness of its inflation hedge the arguments for and against investing in commodities as an inflation hedge are usually centered around variables such as global population growth technological innovation production spikes and outages emerging market political turmoil chinese economic growth and global infrastructure spending these continually changing factors play a role in the effectiveness of inflation hedging 