how inflation affects your investments

 

how inflation affects your investments

Publish on 1 september2025

Introduction 

Equities: Growth—Until They Don’t

Equities harbor a paradox. In periods of moderate inflation—creeping forward, single-digit style—they often thrive as corporate revenues climb. Rising prices can signal economic expansion, and stocks may ride the wave upward.

But let inflation spiral out of control, and everything shifts. Production costs clamp down. Profit margins shrink. Consumers tighten belts. It’s a double-edged sword: growth—or grind. 

Fixed-Income: Safe Yet Eroding

Bonds, fixed deposits—pillars of stability. Yet here’s the catch: their returns are fixed. If your investment earns 6% interest but inflation runs at 7%, you’re effectively losing purchasing power. Your real return becomes negative.

Thankfully, inflation-indexed bonds offer a lifeline. They adjust their principal with inflation—so your money doesn’t simply erode. 

Alternative Assets: Tangible Shields

Gold. Real estate. Commodities. These aren’t just buzzwords—they’re shelter. Tangible, enduring, inflation-prone in a good way. During cost surges, their values often rise. Gold gleams brighter. Real estate commands higher rents. These are assets that remember their worth—even when currencies falter. 

(A Burstily Recrafted Perspective)

Inflation isn’t just a number whispered by economists—it’s a subtle, relentless force that gnaws at the value of your money, day by day. It’s not merely prices climbing; it’s the shrinking potency of your pounds. Suddenly, that extra tenner doesn’t stretch as far, and before you know it, a modest paycheck buys noticeably less. This erosion of purchasing power is inflation’s power play—turning yesterday’s crisp notes into tomorrow’s fraying threads. 

How Inflation Works

Each month, the Office for National Statistics embarks on a quietly epic mission: comparing the current basket of groceries, petrol, and even your holiday essentials, against the same items a year ago. That tiny shift—a loaf of sourdough here, a pint of milk there—coalesces into the inflation rate. It’s modest, almost invisible—but creeping. 

Why Inflation Rises—and Speaks in Many Voices

1. Demand-Pull Inflation

Picture a single bakery in a small town, baking 100 loaves of bread daily. Suddenly, 150 people move in. Still only 100 loaves get baked. What happens? Prices rise. The cost hasn’t changed; it’s demand overpowering supply. 

2. Built-In (Wage–Price) Inflation

Wages go up. Businesses pay more. So, they charge more for goods. Workers demand more to afford the higher prices. A spiraling dance of expectation and reaction.

3. Cost-Push Inflation

Costs of inputs—materials, rents, energy—rise. Producers shift the burden to consumers. Everyday goods inch upward.

4. Money Supply Inflation

Extra pounds flood the economy. More cash chasing the same goods = higher prices.

Inflation vs. Investments: A Tenuous Tug-of-War

Imagine your investment rose by 5%, but inflation galloped at 1%. Your real return? Just 4%. The gap between nominal growth and lived value—it matters. But not all asset classes feel inflation's bite the same way:

1. Stocks: Companies that can pass on rising costs may help you stay ahead—but risk remains.

2. Bonds: Locked-in fixed interests? Inflation blindsides you, eating into the future payments you're set to receive.

3.Real Estate: A paradox. On one hand, mortgage rates spike, dampening demand. On the other, property values often chase inflation, rising due to supply constraints and demand.

4.Savings: If your interest doesn’t outpace inflation, you’re actually earning negative returns. Your money is losing ground. 

Inflation’s Silent Sandpaper Effect Over Time

Even tame, persistent inflation chips away at value. A compelling study from Aviva shows £100,000 today—under 1% inflation—shrinks quite significantly over three decades. Let that rate pick up to 3%, or 5%, and the decline in real value is stark. 

Strategies to Counter Inflation’s Whittle

1. Diversification: Spread across asset types—equities, real estate, inflation-linked bonds—to reduce inflation risk.

2. Equity Exposure: Stocks have historically beaten inflation in the long run, albeit with volatility.

3. Index-Linked Bonds: These adjust with inflation, offering a buffer.

4. Expert Advice: Tailored guidance can help you craft a resilient strategy.

Final Musings

Inflation might feel like a distant policy bulletin—but it’s intimate, daily. It whispers in price tags, it multiplies across years. Ignoring it? That’s letting your future self buy less, for more. Understanding it and investing thoughtfully?