My wife and I had dinner with some friends over the weekend. They are all retired and living on fixed incomes. For that reason, they aren’t too worried about the global financial markets. To them, the stock market’s daily vacillations are little more than an amusing distraction.

However, they are very concerned about inflation. Since their incomes are fixed, higher prices for food, gasoline, and everyday goods mean less money is left over for vacations and other discretionary expenses.

Towards the end of the evening, one of them asked: “Is there some way we can profit from rising inflation in our investment accounts to offset higher consumer costs, especially if it takes longer than expected to bring inflation under control?”

That’s a great question. Everyone is hoping that Federal Reserve Chair Jerome Powell is successful in slowing down inflation without undermining the jobs market and consumer spending. That is the “soft landing” that Wall Street is desperately hoping for.

However, there’s a problem with the soft landing scenario. The faster the Fed raises interest rates to stymie inflation, the greater the risk that the economy will lapse into recession. For that reason, it may take longer than a lot of people think until the annual growth rate of inflation is once again at the Fed’s target level of no more than 2%.

If that turns out to be the case, then having an effective inflation hedge in your investment portfolio is a must. Below are three exchange-traded funds (ETFs) that I believe are particularly well-suited for that purpose.

iShares Bloomberg Roll Select Broad Commodity ETF (CMDY)

Despite its tongue-twister of a name, this fund is actually quite simple in concept. It buys future contracts on various commodities including agriculture, energy, precious metals, and industrial metals.

As those contracts expire they are replaced, or “rolled”, into new contracts. As the prices of those commodities contracts rise and fall over time, so does the share price of this fund.

CMDY started this year trading a little below $50. By June it was above $68 but has since pulled back to $60. If next month’s Consumer Price Index (CPI) report is hotter than expected, it could once again take off.

SPDR S&P Metals and Mining ETF (XME)

Precious metals have long had a symbiotic relationship with inflation. Long ago, that was primarily due to the use of some metals such as gold and silver as currency. More recently, other “rare earth” metals are being used to make batteries for the rapidly growing electric vehicle market.

Since there is a finite amount of those metals, their prices tend to rise when inflation lessens the purchasing power of money. Unlike oil which is subject to geopolitical production constraints, the supply of metals remains fairly constant so their prices correlate more highly with inflation.

XME does not own precious metals. Instead, it owns shares of the mining companies that produce them. And since their production costs are relatively flat, a jump in wholesale metals prices can substantially widen their profit margins.

Invesco DB Agriculture Fund (DBA)

If you shop for groceries then you know that food prices have been going up a lot lately. During the past year, the CPI for food grew by nearly 11%. That’s its largest 12-month increase in over forty years.

Since everyone has to eat, there is no way to avoid higher food prices. However, you can participate in higher agriculture prices by owning shares of this fund. It purchases futures contracts on food staples such as corn, coffee, sugar, and soybeans.

Food prices are rising for several reasons including world population growth, extreme weather conditions, and higher transportation and storage costs. For that reason, DBA may continue to appreciate long after inflation is brought under control.

I’m not sure if my friends were prepared for my long-winded response to that question. Hopefully, they have more than just a passing interest in protecting their financial assets from what may turn out to be the biggest rise in inflation in nearly 50 years.

How you choose to combat inflation is entirely up to you. In addition to these three funds, increasing the overall return on your investment portfolio is a great way to offset higher consumer prices.

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