Is there a way for an individual (i.e., excluding institutional tools and using only consumer products) in the U.S. to hedge inflation over the long term greater than that measured by CPI-U? Specifically, for a household that expects higher inflation because their spending is not well represented by CPI-U, is there a way to hedge more than TIPS bonds would? I'm not interested in short-term hedges like leveraged TIPS ETFs but a way to hedge throughout retirement, for example.
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$\begingroup$ Not to my knowledge... but you and Bodie are the experts on retirement and inflation. ;) $\endgroup$– Alex CJul 2, 2019 at 20:05
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$\begingroup$ Printed and framed. ;-) Know a good financial engineer? $\endgroup$– RCafeJul 2, 2019 at 21:13
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1$\begingroup$ TIPS pay-off is already different from inflation stricto sensu (it depends on rates and current assumptions of future inflation) $\endgroup$– LlianeJul 3, 2019 at 3:15
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$\begingroup$ Are you looking for suggestions/ideas or a definitive, proven method? $\endgroup$– amdoptJul 5, 2019 at 18:29
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3 Answers
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Take a job in the industry you feel will experience the inflation in excess of CPI-U?
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$\begingroup$ Good thought but these are primarily retirees or about to retire. $\endgroup$– RCafeJul 9, 2019 at 15:01
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All of your ideas are greatly appreciated. I was asked if it is possible for a retiree to hedge inflation risk greater than CPI-U. My guess was that it is not because the U.S. Treasury absorbs CPI-U inflation risk but I'm unaware of a counter-party that would hedge more risk. CPI-E is experimental and runs about 50 basis point higher than CPI-U I believe, mostly due to higher healthcare costs.
The reason for my question was to find out if there is any hedge that could approximate CPI-E or thereabouts. The head of a financial engineering department told me that he agreed with my assessment that there is none (and further noted that most inflation hedges are inefficient in practice).
Rather than stating that there is no way to hedge inflation greater than CPI-U, I suppose I should state that I have been unable to find one.
Thanks for all your comments.
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No individual instrument - but if you look at the differences between said households basket and the aggregate CPI-H basket and identify the difference you can potentially look to hedge price increases by use of other retail instruments e.g.; natural gas futures, agriculture commodities/etfs, retailers etc.
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$\begingroup$ Good point. The major difference by far between CPI-U and CPI-E is health care costs. If there were a good hedge for that, then combining a CPI-U hedge with a health care hedge would probably do the trick. Unfortunately, I'm not aware of one of those, either. $\endgroup$– RCafeJul 9, 2019 at 15:03