Should You Invest During High Inflation? What History Tells Us
With inflation still above 3 percent, many investors are unsure whether to stay in cash or buy into markets. Here’s what historical data reveals about investing during inflationary periods.
Periods of high inflation often make investors nervous. Rising prices erode purchasing power, increase borrowing costs, and reduce the value of fixed-income returns. Yet, history shows that strategic investing during inflation can protect — and even grow — long-term wealth.
Understanding Inflation’s Impact on Investments
Inflation affects every asset differently. When prices rise faster than expected, returns must exceed inflation to maintain real value.
Typical effects include:
- Cash: Loses purchasing power quickly.
- Bonds: Fixed interest payments become less valuable.
- Equities: Can perform well if companies maintain pricing power.
- Real Assets: Often appreciate as replacement costs rise.
According to the Bank of England, during previous inflationary decades such as the 1970s and early 1990s, diversified portfolios outperformed those held primarily in cash.
Asset Classes That Historically Perform Well
1. Equities with Pricing Power
Companies that can pass higher costs to consumers — utilities, consumer staples, and healthcare — tend to maintain margins.
2. Commodities and Energy
Commodity prices often move in step with inflation. Exposure through ETFs or diversified funds provides a hedge against rising costs.
3. Real Estate and Infrastructure
Property and infrastructure investments rise in value as building costs and rents adjust. Real estate investment trusts (REITs) also offer inflation-linked dividends.
4. Inflation-Linked Bonds
UK gilts and US Treasury Inflation-Protected Securities (TIPS) adjust returns based on inflation indexes, protecting against real value loss.
Lessons from Previous Inflation Cycles
- 1970s: Investors who stayed diversified through equities and property recovered fastest after inflation stabilised.
- 2008–2011: Commodity exposure protected portfolios while central banks fought post-crisis inflation.
- 2021–2023: Investors with global diversification and exposure to energy outperformed domestic-only portfolios.
Modern Strategies for 2025
With inflation hovering around 3.4 percent, cash savings alone no longer preserve value. A balanced approach is recommended:
| Asset | Example | Target Allocation |
|---|---|---|
| Equities | Global index funds | 45% |
| Bonds | Inflation-linked gilts | 25% |
| Real Assets | Property or infrastructure funds | 20% |
| Cash | Emergency fund | 10% |
Rebalancing quarterly ensures portfolio risk remains aligned with inflation trends.
The Role of Interest Rates
Higher interest rates, while challenging for borrowers, can create new opportunities for savers. Fixed-income yields above 4 percent offer stable income for conservative investors. Laddered bond strategies can smooth returns across changing conditions.
Risk Management
Inflation periods test investor discipline. Avoid reactionary selling or chasing short-term trends. Focus on long-term value, liquidity needs, and tax efficiency.
Practical tips:
- Maintain 3–6 months of expenses in cash.
- Diversify globally to reduce local inflation exposure.
- Review investment fees, as high costs compound losses.
- Focus on companies with real assets and sustainable demand.
The Bottom Line
Inflation may erode cash value, but it also rewards strategic investors. By diversifying into assets that grow with prices — and avoiding emotional reactions — investors can turn inflation risk into opportunity.
Long-term, disciplined investing remains the best defence against the hidden tax of inflation.
References:
- Bank of England – Inflation and Market Data 2025
- Morningstar – Inflation Hedge Performance Study 2024
- ONS – Consumer Price Index Review 2025
- BlackRock – Inflation Investing Insights 2025
