Which asset class outperforms the market during inflation?

U.S. inflation data continued to beat expectations, and investors worried that their portfolios were at risk of inflation poured money into inflation-protected bond (TIPS) funds. But State Street's latest research report shows that historically, this strategy has not helped investors defend against inflation risks. Commodities such as oil, copper and soybeans, but not TIPS, are the best hedge against rising inflation. Natural resource stocks (i.e. stocks of commodity-producing companies such as mining companies or oil companies), REITs and infrastructure stocks are also more resistant to inflation than TIPS, the analysis said.

First introduced in the late 1990s, TIPS is theoretically an almost perfect investment for retirees and other investors looking for a low-risk yield. They are issued by the U.S. Treasury and, like other Treasuries, carry little risk of default. Unlike other Treasuries, they also adjust payments based on consumer price inflation.

But today, TIPS offers guaranteed interest rates below inflation. In other words, whether prices rise 2%, 5%, or 10% over the next few years, the purchasing power of investors will definitely decline. The bond market now expects inflation to average 2.73% over the next 10 years. This is the highest forecast made by the market this century, a sharp increase from January's 2%. On the other hand, it's still a long way to 70s.