It Could Be Time to Hedge Against Inflation

The war in Iran has stoked inflationary pressures. Throughout the uncertainty around the status of the Strait of Hormuz and the global oil supply, the price of crude oil skyrocketed, closing April 2026 around $106 per barrel before settling at around $92 per barrel by the end of May. A preliminary agreement between the US and Iran, including the reopening of the strait, has brought a potential end to the war in sight. In turn, the price of oil fell significantly to about $73 per barrel as of June 29, near prewar levels.

Still, significant uncertainty remains regarding the Strait of Hormuz, and the price of oil and inflation should remain a priority. Given that oil is a major input in most corporate industries, its higher price puts significant upward pressure on costs throughout the economy, and price increases often come with a lag.

While inflation erodes most investment types, some areas of the market stand out in shielding investors from its negative effects. And while these parts of the market should not make up a portfolio’s core, they offer attractive potential diversification benefits.

The inflation-protected bond and short-term inflation-protected bond Morningstar Categories consist of funds that are largely filled with Treasury Inflation-Protected Securities. These securities’ principal balances are adjusted by changes in the Consumer Price Index, with fixed-coupon interest payments based on the inflation-adjusted principal amounts, but they are not expected to protect against all inflation. Rather, these securities protect against inflation shocks and outperform nominal bonds when actual inflation exceeds expected inflation and real yields fall. Like other fixed-rate bonds, TIPS have interest rate risk and are hurt by rising yields, so interest rate hikes, which often follow periods of high inflation, will similarly hurt performance.

Vanguard Short-Term Inflation-Protected Securities Index VTAPX stands out as a top passive short-term option and has a Morningstar Medalist Rating of Gold. Its portfolio consists exclusively of TIPS with less than five years to maturity. Over the long term, the fund’s muted duration curbs potential return, likely leading to lagging performance versus its longer-duration actively managed counterpart, Vanguard Inflation-Protected Securities VAIPX. However, its shorter-duration structure provides an inflation hedge that isn’t as hurt by rising rates, thus providing lower volatility.

Commodities funds are perhaps the simplest protection against inflation. During periods of high inflation, these funds generally profit significantly, but there’s no such thing as a free lunch in financial markets. In periods of falling inflation, these funds can sell off dramatically, frequently trailing all other categories.

There are commodities broad-basket funds and commodities-focused funds, and while the former will be more diversified, their portfolios still can be quite concentrated in individual commodities, namely gold and precious metals, which warrants further scrutiny with these funds.

Neutral-rated Pimco CommodityRealReturn Strategy PCRAX is a diversified option in the commodities broad-basket category that tends to have more risk in the petroleum markets versus other sectors, which often drives relative performance. The strategy invests some assets in commodities derivatives and, unlike most peers, holds a collateral sleeve of short-duration TIPS rather than lower-yielding cashlike securities. This increases interest rate sensitivity but also provides further protection against inflation shocks. This fund is geared to an environment where inflation rises but interest rate hikes are less likely.

This article first appeared in the May 2026 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.