What asset classes protect against inflation?

Many investors' greatest worry now is a return of higher inflation rates. The United States and Germany, for example, registered annual inflation rates in May of 5.0% and 2.5%, respectively. Against this background, investors want to know what influence rising prices will have on the real performance of their portfolios and what asset classes offer inflation protection. Does investing in gold really provide such protection, and how do tradition-al investment vehicles like stocks and bonds fare in this respect?

Our first approach to answering these questions is to look at the past and analyze in particular the sensitivity of individual asset classes to price increases and their reliability in achieving real value gains in periods of high inflation. An asset class with suitable inflation protection should exhibit a parallel movement of real return and inflation rate. A frequently used sensitivity measure is called the "inflation beta" and is calculated using a regression of inflation rates to real rates of return. If we evaluate the real returns based on a holding period of one year for various US asset classes from January 1974 to March 2021, we get a very heterogeneous picture. While traditional asset classes like stocks (S&P 500 index) and bonds (US government and corporate bonds) exhibit a negative inflation beta, gold and commodities distinctively have positive inflation betas. Real estate investment trusts (REITs) are in between with a slightly negative inflation beta.