The absence of a hedge against inflation is driving many investors away from financial assets toward real estate, gold and silver. Such a hedge could be provided by markets in which investors trade futures or options contracts whose values are tied to the Consumer Price Index.
In a CPI futures market, investors trade the right to purchase an amount in dollars equal to the CPI. The buyer of CPI futures effectively locks in, at the current price of the contract, the future cost of the market basket of real goods the Bureau of Labor Statistics uses to compute the CPI. He can use the contract to hedge purchasing power risk, not only in future wages, pensions, dividends, interest or alimony, but also in the ownership of financial assets.
In a CPI options market, the buyer obtains the right to purchase for a predetermined price an amount of dollars equal to the CPI. An options contract may appeal to those investors who wish to protect themselves from an unexpected increase in the rate of inflation without forfeiting the gains they might experience from an unexpected decrease.
The current price of the futures contract represents an equilibrium price, in the sense that everyone who believes that inflation will be more rapid than implied by that price will tend to buy, whereas everyone who believes inflation will be less rapid will sell. The current price of the contract thus provides a continuous measure of consensus expectations regarding inflation.
Furthermore, because they shift risk to the speculator willing to bear it, futures and options markets may actually encourage inflation indexation. Life insurance companies and pension plans can offer policies with benefits linked to the inflation rate, hedging their commitments in the CPI markets. Most important, by replacing real goods as an inflation hedge, CPI futures and options markets discourage hoarding, hence encourage capital investment.