How to Hedge Against Inflation as a Business Owner

The term "inflation hedge" typically refers to an investment strategy designed to counteract against potential future losses incurred as a result of inflation. Inflation is defined as a wide-spread rise in the price of goods, and is generally believed to negatively impact stock and bond values. Inflation also indirectly depreciates the value of currency by reducing its buying power. An investor may consider a shift away from cash to hard assets in anticipation of an inflationary period. A business owner, with or without an investment portfolio, also may benefit by creating a hedge against inflation. In this article, you will learn a few of the methods that investors and business owners use to guard against the adverse affects of inflation on stocks, bonds, equities and cash holdings.


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    Build an inflation hedge for your investment portfolio. Traditionally, the most effective hedge funds have been built on hard assets. The value of assets like gold, commodities, real estate, oil and natural gas have proven to be less vulnerable to inflation. Additionally, as the buying power of a given currency depreciates in step with the rising price of goods, some hard assets appreciate as a result of inflation.
    • Diversify your portfolio. Diversification has long been a popular method of protecting against market instability. Diversifying an investment portfolio to include less, stocks, bonds and cash assets in favor of hard assets can create a hedge against inflation.
    • Shift a portion of your portfolio to commodities. The term commodities refers to staple resources, such as, oil, coal, sugar, rice, wheat, copper, soybean and precious metals. Transitioning a percentage of your portfolio towards commodities may counter the negative effects of inflation.
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    Create an inflation hedge for your business. Business owners also have a vested interest in the effects of inflation on the overall profitability of an organization. Inflation not only impacts negatively upon the buying power of a business's operating capital but can also have a negative impact on operating costs and sales. There are a number of ways to inflation hedge a business.
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    Keep abreast of inflationary trends. Monitor trends in inflation, interest rates and the rate of return given on various soft assets. Understanding the relationships between these factors, and the implications of any fluctuations in their ratios, is essential in formulating a sound investment strategy.
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    Stock up on products and supplies while prices are low. Retailers of non-perishable products can hedge against inflation by stocking up on the products they sell. Provided the company's infrastructure can support an inventory surplus, an anticipated increase in the cost of goods can be countered by purchasing the products while prices are comparatively low.
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    Convert surplus cash assets to hard assets to hedge a business against inflation. Capital, in the form of cash holdings that are over and above the required operating expenses, can be converted to hard assets. The converted resources will no longer be subjected to the adverse affects of inflation upon the value of currency.
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    Raise prices and cut expenses. Any increase in the cost of doing business should be reflected in an organization's pricing structure. Typically, the selling price of a product or service is determined by the ratio of cost versus the amount of revenue required to maintain profitability. The mark-up of a product is often determined as a percentage of the cost of doing business. Additionally, a decrease in sales will often translate into a decrease in production, as well as a measurable decline in the need for related operational expenses. Adjust the costs of doing business according to your sales projections.


  • Business owners should retain some cash assets above projected operating expenses to provide for unforeseen emergencies. In the absence of other forms of readily available cash flow, such as credit lines, a percentage of liquid assets should be maintained.

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