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How Inflation Affects Your Investments?

The U.S is currently experiencing the highest inflation levels since 1981. From real estate and stock market to commodities and bonds, what is the impact on your investments?
Author: Lorraine Smithills
Lorraine Smithills

Writer, Contributor


Lorraine is a freelance finance writer with years of experience in the banking sector and after a successful career in one of the largest retail and commercial financial services providers. She has a passion for helping people with less financial confidence to get control of their money through budgeting, saving, and responsible credit practices.
Interest Rates Last Update: April 15, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Lorraine Smithills
Lorraine Smithills

Writer, Contributor


Lorraine is a freelance finance writer with years of experience in the banking sector and after a successful career in one of the largest retail and commercial financial services providers. She has a passion for helping people with less financial confidence to get control of their money through budgeting, saving, and responsible credit practices.
Interest Rates Last Update: April 15, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

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Table of Content

The U.S is currently experiencing the highest inflation levels since 1981. There are three main factors driving the current inflation trend.

  • The 2020 Coronavirus Pandemic: While the health issues surrounding the 2020 Coronavirus pandemic are starting to become resolved, the economic effects are still being felt. The pandemic caused shipping routes to become clogged, businesses stopped trading and production facilities shut down.

The government introduced a number of financial measures as support for the economy during this trying time, but this led to excess demand, which has contributed to increasing inflation.

  • Energy Issues: The price of crude oil has consistently reached $100+ in recent months, which has a direct impact on prices at the pump. While this is frustrating for most consumers, it has a far reaching impact since transport companies also need to pay the higher gas prices.

This contributes to higher food and service prices. The energy issues have been exacerbated by green policies and the Ukraine conflict. The Russia sanctions have created uncertainties in the global market and potential supply disruptions.

  • Rising Wages: Finally, the U.S is seeing a period of rising wages throughout many industry sectors including agriculture and food. According to data from the Bureau of Labor Statistics, employment costs are continuing to rise and have now surpassed pre pandemic trends.

What is Causing Inflation?

Inflation can be caused by a number of factors, but the root cause is an increased money supply in the economy. The money supply can be increased by the FED by printing and giving out more money to citizens, loaning new money into existence and legally devaluing the legal tender currency.

Regardless of the approach, the money will end up losing purchasing power. There are three mechanisms that can drive inflation.

  • Demand Pull: This occurs when there is an increase in money supply that stimulates the overall demand for goods and services. This can lead the economy to have more rapid demand compared to the production capacity. This creates price rises and inflation.
  • Cost Push: This occurs as a result of production process inputs. When an additional supply of money is channeled into asset markets, particularly accompanying a negative economic shock, costs of goods can rise. For example, when money supply expansion creates a speculative oil price boom, the cost of energy can rise, which is reflected in inflation measurements.
  • Built In: Built in inflation relates to adaptive expectations. It is based on the idea that people anticipate current inflation rates to continue. As prices rise, workers expect these increases to continue and so demand greater wages to maintain standard of living. The increased wages, increases production costs, which leads to higher prices of goods and services.

Which Investments are Inflation Sensitive?

Inflation can have a different impact on different investments and some investments are more inflation sensitive. These include:

1. The Housing Market

The housing market can be particularly inflation sensitive as both sides can be affected. Inflation can drive up the prices in the housing market. As the cost of living increases, the natural continuation of this trend is that housing prices go up. However, conversely, when the FED increases interest rates to combat rising inflation, the demand for properties may be driven down.

As borrowing rates go up, many potential buyers may decide that it is too expensive to take on a new mortgage. This means that the demand for properties is outweighed by the supply. When there are fewer buyers and more houses on the market, prices will naturally begin to fall.

2. Growth Stocks/Start Ups

High inflation increases the cost of borrowing, which can be detrimental to high-growth tech and start-up companies. With less available capital, tech companies may struggle to innovate, reducing the long-term estimates of earnings.

3. Savings Accounts

This is one area where investors can benefit. Interest rate adjustments are used by the FED to address inflation fluctuations. The FED increases interest rates to reduce the money supply in the market with the aim of bringing down the rate of inflation.

However, these higher interest rates can benefit savers. You should be able to access higher rates on the best savings accounts, CDs and high yield accounts.

How Does Inflation Affect Real Estate?

As we touched on above, there are several different effects of inflation on the real estate market.

If you’re interested in investing in real estate to earn a passive income, higher inflation can be a positive for you. Although you will need to pay more to maintain the property, you can expect to command a higher rental rate. However, if you want to invest in real estate to flip properties, high inflation can have a detrimental impact on your investments.

This is due to inflation increasing the cost of living. When inflation is low and people have more disposable income, they may be tempted to upgrade to a bigger home or take the steps to purchase their first home.

When inflation starts to rise and people are struggling to pay for essentials such as groceries, gas and energy, they are less inclined to take on a larger financial commitment.

FED Rates Push Down

This is compounded by the FED increasing interest rates. When potential buyers are confronted with higher mortgage rates, it will further bolster their reluctance to invest in a new property.

The reduced number of potential buyers can eventually lead to a fall in property prices. While you may be able to make good real estate investments, you don’t want to be caught in a negative equity situation, where you have paid more for the property than it is worth in the future.

For example, rates skyrocketed in 2007, it triggered the bursting of the property bubble that left many people in financial difficulties. While experts are not anticipating a housing crash due to the current inflation rate, potential investors should still be aware of the risks.

How Does Inflation Affect the Bonds Market?

There are two ways that you can profit from investing in bonds; interest paid or an increase in the price of the bond. This is where inflation can have a detrimental impact on the bonds market. Inflation not only erodes the purchasing power of the future cash value, but it also reduces the “real value” of any interest you earn.

For example, if a bond pays a 5% yield and inflation is 4%, you’ll only be getting a real rate of return of just 1%. The difficulty with bonds is that they are typically fixed term investments. If you try to liquidate before the agreed term, you’ll get far less than the face value. So, if inflation is on the rise and you tie your money up for three, four or five years, you may be disappointed in the real value of your asset when it matures.

Fortunately, there is an alternative within the bonds market that can provide an effective way to offset inflation risk. TIPS or Treasury Inflation Protected Securities provide a real rate of return that is guaranteed by the U.S government. When inflation goes up, the principal value of the TIPS are adjusted upward. However, the reverse can also apply. In a scenario where there is deflation, the principal TIPS value is adjusted downward.

Is the Stock Market an Inflation Hedge?

This depends on what you choose to invest in. As with at any time, you’ll need to think carefully about which shares, ETFs, and other assets you put your money into. As we’ve touched on above, growth companies and start ups tend to have greater difficulties in times of high inflation, so you may want to avoid these types of shares. Private bonds can also be volatile when inflation is high.

However, investing in the stock market does typically offer greater inflation protection compared to leaving your money in a savings account. Investing in equities typically provides a better way to outrun inflation. Historically, these types of investments have provided the only good way to stay ahead of rising inflation rates. 

Just make sure that you adopt a long term strategy. Equities can be volatile, so they may not be the best option if you’re looking for a place for your money in the short term. You will still need to perform your own due diligence to ensure that you are purchasing equities that meet your investment strategy criteria for long term success.

How Does Inflation Affect Savings Accounts?

Higher inflation can actually be viewed as a positive thing for saving account customers. When the FED adjusts the interest rate up to try to manage the rising inflation, banks typically also adjust their rates. This means that the interest rates for lending products and deposits both go up.

When the bank rates are adjusted, you’re likely to receive a notification from your bank or financial institution to let you know the new rate.

If you’re shopping for a new savings account, you may notice that most banks are competing to offer the most attractive rates. This makes it easier to find a savings account that offers a decent rate on your funds.

However, the downside to this, is that the savings rate may not be more than the rate of inflation. In times of low inflation, when the levels are at less than 2%, most savings accounts pay less than 1%. While this isn’t particularly noticeable, when inflation starts to get higher, you will start to notice that your savings lose their purchasing power.

For example, if you had $100 and at the time you put it in the savings account, this could have bought 100 loaves of bread. After one year, the same $100 may only be able to buy 85 loaves of the same bread. This means that although you have the same $100, plus a little interest, you will be able to buy less with the money.

How Does Inflation Affect Commodities?

Commodities including precious metals, oil & gas, and agriculture goods are often considered portfolio diversifiers, which may serve as a hedge against inflation. Although there can be a negative correlation between asset market prices and commodities, many commodities tend to respond to the changes in the relative strength of the dollar in international markets rather than the pressures of domestic inflation rates.

The two way relationship between inflation and commodity prices has declined over time. While in the 1970s, this relationship was statistically robust and highly evident, this correlation has become less significant over the last 30 years. This is likely due to the greater influence of globalism, which has removed some of the volatility that previously impacted commodities.

However, commodity prices do typically perform well, particularly when there are other factors such as exchange rate fluctuations evident in the economy.

This means that if you want to hedge inflation, investing in commodities is certainly worthy of consideration.

Which Commodities are Best at Inflation Hedging?

There are a number of commodities that may offer the best inflation hedging. These include:

  • Precious Metals: Precious metals such as gold or silver have high economic values, providing a great hedge against higher rates of inflation. Historically, gold has been used as an alternative currency when an economy is weak. However, the price of gold can experience wild fluctuations, so you need to be prepared for this when planning your investment strategies.
  • Industrial Metals: Industrial metals such as aluminum and copper tend to show solid price appreciation. A good possible option for hedging inflation in 2022 is lithium, which is a primary industrial metal that is used to produce EV batteries. As many economies are moving towards greener energy, the demand for EV batteries is likely to grow.
  • Energy: Energy historically moves closely with inflation rates. Energy impacts every economic sector, so they will be required regardless of whether the prices start to skyrocket.

How Does Inflation Affect Retirement Planning?

With the rising cost of living associated with higher inflation, those close to retirement may need to reconsider their investment strategies. If you want to beat inflation, you may need to be prepared to take a less risk-averse approach. While you may have previously been able to meet your retirement financial goals with bonds, CDs and other less risky products, you may need to consider investing in commodities, shares and other assets.

If you still have a decent timescale for your retirement planning, you will still need to take a long term approach. This may still require taking a less conservative approach, but you will have the time needed to make appropriate adjustments if your portfolio is not achieving your desired targets.

5 Things Investors Should Keep In Mind During Inflation:

  • The Real Value: It is important to always think about the real value of your investment before you commit to any product or asset. While a high interest rate or high rate of return is a good thing, if you need to tie your money up for years to get this return, it may be outstripped by the rate of inflation over that period.
  • There are Short Term Options: If you’re concerned about inflation, but you don’t want to tie your money up in the long term, there are some short-term options you could consider. Short term CDs allow you to harness a higher rate, but you don’t need to worry about tying your money up at a rate that will be outpaced by inflation. You can put your funds in a six-month CD and while you won’t get the highest rates, you can reinvest when the CD matures.
  • Historical Results: Past performance is not a guarantee of future returns. However, by looking at how specific industries and assets performed during previous periods of high inflation can give you a good indicator.
  • Your Risk Aversion: While hedging against inflation is a great idea, you need to honestly assess your risk aversion to ensure that you feel comfortable before you make an investment.
  • Diversification: With greater potential volatility, it remains important to keep your portfolio and investments diverse. This will minimize the investment risks, as gains in profitable niches can cover for potential losses in other areas.


Superficially, crypto should be a good hedge against inflation. Because of the limited supply of  coins, crypto could be considered a digital form of commodity, such as gold or other precious metals. However, from November 2021, the value of Bitcoin dropped by 75% and many other coins have followed this trend. Generally, we don't believe in Bitcoin.

This has highlighted a volatility that many people did not previously associate with crypto. While the peaks and troughs of crypto may not be linked to inflation, this volatility may suggest that it may not be the best hedge against inflation.

To fully understand inflation, it can be helpful to know how to calculate the inflation rate. This involves using a simple inflation rate formula that allows you to see the percentage increase in cost between the specified years. When you understand how to calculate the inflation rate, it will be easier to maintain your budget.

The Basic inflation rate formula is calculated with A as a starting cost and B as the ending cost.

  • Subtract A from B to see how much the price of that good has changed.
  • Divide the result by A, which will leave you with a decimal figure.
  • Convert the decimal into a percentage by multiplying by 100.

This may sound a little complicated, so we’ll put it into context with an example. We’ll take the price of a white pan bread. According to the Bureau of Labor Statistics the average price was $1.41 in May 2020. In May 2022, the average price was $1.61. We can now apply these figures to the inflation rate formula.

  • $1.61-$1.41 = $0.20
  • $0.20 /$1.41 = 0.142
  • 142x 100 = 14.2% inflation.

Every month, inflation is routinely measured. The price of thousands of commonplace things is evaluated in order to determine how quickly prices are rising. To prevent the nation from entering a recession, the FED seeks to control periods of excessive inflation.

The FED and the American public's tolerance, however, determine where inflation tends to settle and how long periods of high inflation persist

There are a variety of factors that support the inflation, such as pandemic exit , environmental regulations, the situation in Ukraine, and others, are to blame for the rising inflation. It might take longer for FED policies to adjust the rate of inflation because there isn't just one straightforward solution that can solve these fundamental problems.

When there is economic uncertainty, such as a financial crisis, it is the best moment to buy gold. Gold typically serves as a greater hedge against inflation and a financial crisis than it does against rising prices.

The price of gold tends to increase when other investment types, such as equities, bonds, and real estate, are performing poorly because most investors rush to buy gold as a hedge against the losses collected in other investment types. Just make sure you do it via a reputable gold dealers.

When deciding when to increase the amount of gold in your portfolio, keep an eye out for any unfavorable political or economic signals regarding debt, credit, unemployment, and currency in the world's three most powerful economies—the US, the Eurozone, and China.

There may be a chance to purchase stocks during a bear market. You should be conscious of the adage “never go against the trend,” though. Your decisions will be extremely speculative and dangerous. However, it does not indicate that there are no business chances in this sector.

You must first comprehend the trendline by deciphering resistance and support movements. For instance, some investors purchase long during support while others sell short during resistance.

The stock market's fundamental characteristics are to blame for the behavior. The stock market typically exhibits nonlinear behavior. They follow a cycle. As a result, you can take advantage of buying opportunities when they arise. Another strategy is to wait until the bear has run out of steam before the market turns. You should purchase your equities while the market is rising.

No, generally. Unlike securities like stocks, treasuries are not listed in a formal exchange like the New York Stock Exchange. As an alternative, you can purchase a treasury bond between the counterparties over the counter.

This entails contacting a broker or bank by phone or stopping by an Electronic Commerce Network (ECN) during an auction. They are therefore accessible to all investors, and you can invest directly in treasury bills without using a middleman.

US Treasury bonds have a low default risk since the federal government guarantees them, despite the fact that they trade over-the-counter.

In general, TIPS interest income is taxed at the same federal income tax rates as any other nominal Treasury security. In addition, they are subject to Phantom Income taxation, which is a fee assessed against the rise in premium value brought on by inflation.

However, by employing deflation adjustments to balance it, you can lessen the effect of this fee. Typically, deflation causes your principal value to decrease. The alternate strategy is to purchase your TIPs using a tax-deferred account, but you should speak with a tax professional to see whether this is a wise course of action.

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Picture of Lorraine Smithills

Lorraine Smithills

Lorraine is a freelance finance writer with years of experience in the banking sector and after a successful career in one of the largest retail and commercial financial services providers. She has a passion for helping people with less financial confidence to get control of their money through budgeting, saving, and responsible credit practices.
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