Lesson 6 of 6 · 13 min
Inflation hedging and diversification
Commodities are a strong inflation hedge because their prices feed directly into inflation, but they fall when inflation eases, while farmland and timberland show little link to inflation yet hold up across regimes; all three diversify a stock-and-bond portfolio thanks to low correlations.
In short
- Inflation hedge: commodity prices, especially energy and food, are part of consumer inflation, so commodities rise when inflation rises.
- Commodity prices are far more volatile than measured inflation, because CPI includes slow-moving items like housing and uses statistical smoothing.
- Commodities do best in rising or high inflation and lose when inflation falls; farmland and timberland show no big contrast across regimes.
- Correlation with inflation: commodities clearly positive and the highest; farmland and timberland near zero, so they are weaker hedges in correlation terms.
- Diversification: all three have low correlations with stocks and bonds; timberland and farmland are nearest zero with stocks, commodities moderately positive (shared business-cycle exposure).
- Farmland and timberland are moderately correlated with each other and slightly negatively correlated with commodities.
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