A house is a better hedge against inflation than a savings account.
Inflation is often defined as a sustained increase in prices for a broad range of goods. Economists explain that rising prices are the symptom, however, and not the cause. The cause of inflation is the devaluation of currency, frequently brought about by the introduction of more currency into the economy. As a simplified example, say there is $100 available to purchase 100 cheese steaks. The price of a cheese steak is going to be $1. Someone prints another $100 exclusively for cheese steaks. The price of the 100 cheese steaks will become $2 each.
Inflationary Effects
Absent economic and supply and demand pressures, the price of goods remains the same. If the only change introduced to the economy is the addition of money, the price of goods will rise. Of course the economy is dynamic–nothing ever stays the same and there are a host of pressures starting and changing every day. But when the influence of other factors is small, more money moving around more quickly will increase the price of nearly everything. So with inflation, housing prices tend to rise.
Leverage
Housing is generally viewed as a good asset when it comes to inflation, in part because it will rise with the inflation rate and in part because it is a leveraged asset. When you buy real estate, you make a downpayment of perhaps 20 to 30 percent of the house price. The house price rises by the rate of inflation times the cost of the house, not by the cost of your downpayment. So if inflation doubled the value of the house, it may have quadrupled the value of your downpayment. If you took out a fixed-rate mortgage, you have done even better because you are making a payment that dropped in inflation-adjusted dollars–you are paying less for the loan than you did when you took it out.
Moderating Factors
Supply and demand influence prices. Even if inflation is high, an oversupply of housing will bring home prices down. Interest rates tend to go up with inflation. Mortgage rates reflect interest rates. If mortgage rates go up too high, people won't take out home loans. Demand will decrease; home prices will fall.
Cyclical Effects
Continued and rampant inflation harms an economy. It has devastating effects on people with fixed incomes, notably seniors. It makes it difficult to compete on an international scale because the currency becomes so devalued. And so at some point, whether through the course of events borne through devaluation or aggressive action by monetary policy to reduce the currency supply, inflation ends. It cannot, and historically never has, gone on forever.
Timing
Because there are so many complex, dynamic, interactive factors influencing the economy, it isn't really possible to predict inflation. But harbingers include substantial influx of spending by the government within a short time frame and an increase in the introduction of money by the treasury. These are actions taken to counteract a contraction in spending in the private sector. Once the private sector recovers to a normal pattern of spending, one might expect the combination of all three actions to result in inflation.