Which assets survive inflation?

With real-vs-nominal glasses on, walk through the instrument zoo from Course 1 and ask each cage the era-defining question: what does inflation do to YOU?

Cash — the long-run loser

Cash loses purchasing power at the inflation rate MINUS whatever interest it earns. Banknotes earn nothing, so at 5% inflation a mattress full of them silently burns the full 5% a year. A deposit paying 4% while inflation runs 5% loses only about 1%. When rates sit near zero and inflation doesn't, the loss is close to the full inflation rate; when short-term rates sit above inflation, cash can quietly hold its ground for a while. Over the very long run cash has roughly kept pace with inflation and no more — optionality and safety for the short run, the weakest of these four for long-run growth.

Bonds — hurt twice

A conventional bond promises FIXED nominal coupons — inflation shrinks every one of them in real terms. Worse, unexpected inflation usually drags rates up, and the Unit 1 seesaw cuts the bond's price too. That's the double hit. (Inflation-linked government bonds — which adjust their payments with CPI — exist precisely as the antidote; meet them properly in the Portfolio domain.)

Stocks — a partial, lumpy shield

Companies sell goods at rising prices, so revenues and profits tend to climb WITH inflation over the long run — a real shield cash and bonds lack. But it's partial and lumpy: inflation also raises companies' costs, squeezes some margins, and — via the rates it triggers — compresses valuations, as 2022 demonstrated to both stocks and bonds simultaneously. Long-run shield, short-run bruises.

Real assets — the classic refuge

Property, commodities, infrastructure — things whose prices ARE part of the inflation basket — historically hold real value better during inflationary bursts. Gold carries a millennia-old reputation here, though its record decade-to-decade is far less tidy than the legend (data-literacy reflex: check the sample, not the story).

The honest summary

No asset enjoys high inflation; they differ only in how badly they take the punch. That ranking — cash worst long-run, conventional bonds hurt, stocks partially shielded, real assets sturdier — is background knowledge for every market conversation in an inflationary year. Understanding, as always here, not advice.

In the data

A real asset's price history looks different from a share's. Here is the benchmark US crude oil price, WTI at Cushing, Oklahoma, for January and October 2022:

One number per month, in dollars a barrel: no open, high or low, no volume, and nothing adjusted, because a barrel of oil has no splits and pays no dividends. A commodity benchmark is named for the product and the place it is delivered, not for a company, and its whole return is the price change — there is no income to add back.

Try it now

1. Rank from memory: cash, conventional bonds, stocks — by long-run inflation resilience. Write the order down before you look at anything.
2. Now grade yourself against the one year everybody remembers. Take 2022 — January to October — and compute the return on stocks (the S&P 500 fund, SPY), long bonds (TLT), cash (BIL) and a real asset (WTI crude). Last value over first, minus one, as a percentage. Stocks, long bonds and cash are the three charts below: Measure January to October 2022 on each and you have three of the four numbers. The fourth is the oil table above.

3. Rank the four and compare with the list you wrote in step 1. The year when inflation arrived is the year the theory in this lesson was examined in public, and the ordering it produced is worth more than any sentence about it.
4. Explain the bond "double hit" in two sentences (coupons + seesaw).
5. Why did 2022 hurt the classic stock-plus-bond portfolio from BOTH sides at once? Two of the numbers you just computed are the answer.