How to invest during inflation

1 min readLast updated November 10, 2023by Rachel Carey

Making the most of your finances is tricky at the best of times, but during times of inflation, it can be even harder. With the right strategy, you can take advantage of inflation-protected assets to keep your savings safe. Here’s your guide to minimizing the impact of inflation on your portfolio.

What is inflation? 

Inflation is the increase in the price of commonly used goods and services across the economy. In the US, this is usually measured by changes in the Consumer Price Index (CPI), which is based on average prices in a hypothetical basket of essentials.  

Between the end of February 2021 and February 2022, the CPI rose by 7.9 percent, the largest increase in over 40 years.  

But why? Supply chain problems triggered by COVID-19, surging consumer demand and rising wage pressures in parts of the economy contributed to the rise. The war in Ukraine has also created geopolitical issues. 

How does inflation impact your investments? 

Moderate inflation – around two percent – is usually accepted as a sign of economic health and stability.  

It’s when prices and costs spiral too rapidly and too far from this figure people start to worry.  

This kind of more pronounced inflation has a destabilizing effect on the economy and hence the markets, too. Household income is under pressure, spending power diminishes, and uncertainty reigns. 

All this is bad news for the average investor, but there are ways to endure and protect your hard-earned investments. 

Three tips for investing during times of inflation 

Here are three moves you can make to protect your money from inflation: 

  1. TIPS – this stands for Treasury Inflation-Protected Securities. They are government bonds that match the rise and fall of inflation, so when it goes up, so does your interest rate. As the Federal Government backs TIPS, they are generally considered a safe investment and a good way to boost future retirement income. Interest is paid at a fixed rate twice a year. TIPS come in five, 10 and 30-year maturities. 

  1. Short-term bonds – here, your money is safe and accessible, and if inflation leads to higher interest rates, short-term bonds are more resilient than long-term bonds. So, it’s a good strategy to stick with short- to medium-term bonds to avoid losses from rising inflation. 

  1. Stocks – investing in stocks can be a good longer-term inflation hedge, but stocks can suffer during short, more extreme inflation spikes. You could consider market-tracking index funds with a good performance record over a longer period – even though they might have dropped in recent months. If you’re in any doubt about getting started, always talk to a professional investment advisor first. 

Three areas to consider investing in 

Certain areas and industries tend to perform well when inflation increases. Here are three to consider:  

  1. Real estate – this is a traditionally good place to invest during inflation as property values tend to increase. In addition to owning your home, you can invest in real estate through Real Estate Investment Trusts (REITs) or funds that invest in REITs. However, in the post-pandemic era, the old rules of real estate investment in times of high inflation may have changed. For example, demand for commercial real estate and office space is still slower as companies move towards remote and hybrid working.  

  1. Commodities – during inflation, the price of raw materials – commodities – such as oil, metals, and agricultural products, usually rises, meaning they can be a good investment. However, this investment area carries a high risk as supply and demand rise and fall unpredictably. Rewards can be high, but losses can be large. 

  1. Silver and gold – both have been used as exchange currency for many centuries, and they remain excellent longer-term investments in many circumstances. The best time to buy silver and gold tends to be when the currency is losing value – during a period of inflation. Alternatively, you could invest in Exchange-Traded Funds (ETFs) that track them, removing the need for secure storage. 

The bottom line 

When protecting your investments against inflation, you have several options.  

It’s important not to make rash decisions or dramatic changes and avoid plunging into high-risk areas you know little about. Instead, use times of inflation to review your overall investment performance and structure to ensure it’s aligned with your goals.  

A professional financial advisor can help you decide the best way forward and what level of risk suits you. Use Unbiased to connect with an advisor today. 

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.