How does inflation affect investments

As well as helping you understand the importance of investing and inflation, this article outlines how, using a diversified, long-term strategy, you could use investing to beat inflation, too.

By Jack Rivers

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Created on: 04/11/2025

Reading time: 3 mins

Inflation. It’s something you’ve heard of. You might even know the basics of how it works. But if you’re reading this, chances are you want to know: how does inflation affect investments?

Inflation is the measurement for how much the price of goods and services increase over time.

When inflation rises, the price of goods and services does the same — which means your money buys less than it did before.

And, to understand the link between investing and inflation, you only have to look back at COVID-19.

Although we’ll explore this in more detail later, in simple terms, the pandemic created a worldwide inflation surge that led to stock markets declining in 2022.

But first, let’s start with the basics of inflation.

A quick recap on what inflation is

Specifically, a quick recap of what’s meant by goods and services.

Goods are the tangible things you buy, like food and clothes; services are what you pay others to do on your behalf, like a haircut or boiler repair. However, inflation doesn’t mean the price of all goods and services rises at the same time, or that it impacts everyone in the same way.

Instead, think of inflation as a blanket term for the rise across the entire economy, representing an overall percentage of how much it’s risen against the previous year’s figure (inflation is reported annually – as of September 2025, the UK inflation rate is currently 3.8%).

What causes inflation?

Because it’s such a complex topic, there are – understandably – lots of reasons why inflation increases. The three main ones are cost-push inflation, demand-pull inflation, and built-in inflation.

Cost-push inflation

In simple terms, cost-push inflation involves prices rising due to higher manufacturing costs.

For example, let’s say you’re in the market for a new car, but the cost of the metal needed to build it has increased recently. As a result:

Building the car becomes more expensive.
The company passes those costs on to consumers.
The price you buy the car for goes up.

Demand-pull inflation

With demand-pull inflation, prices go up when demand for goods and services is higher than the supply.

Whether through lower interest rates or increased lending, it’s caused by governments or central banks introducing more money to the economy.

Using the same car-buying scenario as above, let’s say the company has the capacity to build 1,000 new vehicles a month. With more money pumped into the economy:

Now 1,500 people a month want to buy one of their cars.
However, only 1,000 cars are available, meaning demand now outweighs supply.
With more people competing for the same number of cars, they raise the car’s price.

Built-in inflation

This is when people's expectations of ongoing inflation lead to prices rising.

Also referred to as wage-price inflation, if workers think inflation will continue to increase the price of goods and services, they'll also expect their wages to do the same.

To see built-in inflation in action, let’s head back to the car factory, where:

The cost of living has gone up recently.
As a result, the factory’s workers ask for a pay rise.
To cover these additional wages, the company has to increase car prices.

All this ends up creating, however, is a cycle where wages and prices keep going up at the same time.

How does inflation affect investments?

Before we tackle this subject in more depth, you need to know how inflation affects your cash savings first.

If your cash savings rate is below that of inflation, your money is slowly losing value in real terms.

Why?

Well, you won’t be able to buy as much for your money, which means your spending power decreases.

Now, that’s not to say inflation doesn’t affect investments; after all, if yours have grown by 6% in a year, but the rate of inflation is 2%, your ‘real’ return is actually 4%.

But here’s the thing: because investments could provide better long-term returns than cash savings, that’s why so many people choose investing to beat inflation.

For more information, saving vs investing, please visit our blog:

How does inflation affect different types of investments?

If you are thinking about using investing to beat inflation, it’s important to understand the relationship between the different types of investing and inflation.

Stocks and shares

As you now know, inflation can make company costs rise, which may lower profits and share prices in the short term. Over the long term, however, they can also raise them to stay in line with inflation, helping shares hold their value.

Bonds and fixed income

Because these types of investments usually pay a fixed interest rate, inflation reduces their real value; if prices rise quickly, the money you get from them buys less over time.

Cash savings and savings accounts

To reiterate, if inflation is higher than your provider’s interest rate, it just ends up eating away at the real value of your cash savings. Sure, the amount in your account doesn’t go down — but the power of what it can buy does.

Property

When prices in general go up, property values and rent costs often follow suit. Property and real estate – including Real Estate Investment Trusts (REITs) – can sometimes protect against inflation, although if borrowing costs (interest rates) rise too fast, property prices may still fall.

Commodities

Commodities like oil or metals often become more valuable when inflation rises, simply because they’re tied to physical goods. Gold, in particular, is seen as a 'store of value' when paper money loses its purchasing power.

Investing to beat inflation

Naturally, you want to try and invest in assets that produce a higher return than interest rates.

And, over the long term, those assets tend to be stocks and shares. At Wealthify, for example, we actually offer a dedicated, tax-efficient account for this called a Flexible Stocks and Shares ISA.

Because their performance is tied to the performance of financial markets – not interest rates – stocks and shares have the ability to outpace inflation. As with all investing, however, performance is never guaranteed, and you might get back less than you put in.

As well as investing in stocks and shares to combat inflation, investments that are diversified, held for the long term, and managed by experts can also help.

Diversification

You know the saying “don't put all your eggs in one basket”?

Well, think of diversification as not putting all your money in one investment basket; instead, it's the process of spreading everything across a range of assets, industries, and regions.

This way, you limit the potential for big losses — while maximising your chances of growth.

Long-term strategy

The longer you invest, the more time your money has to grow and beat inflation.

Sounds simple, right?

Well, in theory, it is.

But because financial markets go down as well as up, it's not just time you need to smooth out these bumps in performance, but patience and steel. That’s why, even though investing to beat inflation is a good mindset, it’s worth having a long-term one as well.

Managed by experts

The good thing about investing to beat inflation with Wealthify?

All our Investment Plans are built and managed for you by our team of experts — meaning they’re already diversified and equipped for the long term.

Start your investing journey

At the start of this blog, we set out to answer the following question: how does inflation affect investments?

And, by examining the various causes of inflation, we now know it:

Affects different types of investments in different ways.
Reduces spending power by impacting the ‘real’ value of your investments.
Can be combated with a diversified, long-term investment strategy (as opposed to just cash savings).

And, if you want to try and beat inflation by putting your investments on autopilot, why not leave everything to the experts with our range of award-winning products:

Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.