What makes assets supposedly inflation-proof?

Many people invest to increase their wealth. Besides building wealth, you can shield your money from inflation with the right investments. Indeed, some assets are considered inflation-proof, or at least, inflation-resistant.

You want to protect your savings and investments from inflation. A dollar today buys much less than a dollar a hundred years ago. In fact, according to the Bureau of Labor Statistics, a dollar in 1921 offered a purchasing power equivalent to just over $14 in 2021. Thus, money usually loses value as the years’ pass. In thirty years, the $1,000 tucked under your mattress might be worth less than $500 in today’s dollars.

Over time, production costs often rise, and many resources become more scarce as they are consumed. Growing populations and economic development can also spur demand, potentially driving prices up. Meanwhile, as the money supply increases, individual dollars become less valuable.

As with many things economic, supply and demand play a crucial role in inflation and help determine which assets might be inflation resistant.

Gold is often viewed as the paradigm inflation-resistant asset. For many thousands of years, humanity has lusted for gold. Besides its beautiful sheen, gold is chemically inert. Whereas iron will rust and silver will tarnish, gold largely remains the same over eons. Gold is also limited in supply. In fact, humanity’s entire supply of gold could fit into fewer than four Olympic-sized swimming pools. As a result, the price of an ounce of gold typically increases over time.

These days, some folks are turning to bitcoin and cryptocurrencies to hedge against inflation. Why? Because the total supply of bitcoin is limited while production remains consistently slow. This stands in contrast to the dollar, as the U.S. Federal Reserve can increase supply on a whim, reducing the value of individual dollars.

Real property, including your own home, can be a hedge against inflation. The supply of ground is fixed and homes usually appreciate over time. You can buy into Real Estate Investment Trusts that give you the hedge without a big initial investment.