How to invest to stay ahead of inflation

If it feels like your money doesn’t go as far as it used to, then it isn’t your imagination. As we’ve seen with a certain frog shaped chocolate bar, increases in prices across the economy are very real. But what does it mean for you and your money, and what can you do to stay ahead of inflation?

What is inflation? 

Inflation is defined as the gradual increase in prices throughout an economy and it is generally caused by subtle increases in consumer demand or the costs of production. It is felt widely across most goods and services, including the products in our weekly shop and the energy we use in our homes, this is why its most widely known as an increase (or decrease) in the cost of living. Each index is effectively just a basket of goods at which each is measured against.

The most common measurements for the rate of inflation in the UK are the Retail Price Index (RPI), which is often used to calculate pension income or rail ticket prices, and the Consumer Price Index (CPIH), which is identical to the previously used CPI, but also includes the cost of housing. Due to the varying ways these indices track changes in the prices paid by consumers, and the items included in the basket of goods, they can vary significantly.

It is important to remember that the value of the Pound doesn’t follow inflation in the UK, meaning that whilst prices increase, your money may be falling behind, in real terms.

How does inflation affect investments?

Whilst the effects of inflation may seem negligible in the short term, they can have a substantial impact on the real value of your cash and investments over time. For example, if you had a £10 note 21 years ago, the goods and services it could have purchased would now cost you £17.24 and shows how its purchasing power has been reduced by 42% because of inflation – that’s equal to 2.8% a year!

Whilst the rate of inflation over the next 20 years is expected to rise slower than it has in the past, even a low rate of inflation can compound or build up, to significantly erode the real value of your money over time, unless you are able to beat it. Let’s talk about how to invest to stay ahead of inflation.

What are the best investments that provide protection against inflation?

Investing with inflation in mind is essential for protecting your wealth and involves choosing assets that naturally keep pace with rising prices. These mostly include either real, tangible assets, or investments that pay a variable rate of interest and appreciate or increase over time.

Over long periods, most cash deposits and fixed interest accounts will lose money in real terms, as the interest paid may be eaten up by the loss in real value of the cash itself. This is especially evident today, as we see record low interest rates with many so-called savings accounts paying as little as 0.01% whilst CPI inflation sits at 1.50% for the year until April 2021, meaning even the highest paying savings accounts (currently a 5 Year Fixed Bond at 1.40% as at May 2021) are leaving savers short changed in real terms, never mind those with money sitting with the high street banks paying some of the lowest rates available.1

Sadly, you can still be losing money in real terms due to inflation in a high interest rate environment as well, as periods of high interest rates are often paired with higher rates of inflation, as the Bank of England uses this tool in its armoury to try and cool any steep rises in the cost of living. So, what are some of these ‘inflation proof’ investments?


Stock market linked investments have proven to be effective in beating the effects of inflation when held for the long-term, consistently delivering returns ahead of prices throughout history - although past performance should never be a guide to the future. As prices rise, the revenues and profits of the companies selling goods and services rise, increasing both the value of their shares and in some cases, the dividends paid to shareholders.

Some equities, particularly those in certain sectors (such as technology) have demonstrated an even better track record in terms of performance in the past and have often outperformed the markets themselves. For investors looking to increase their wealth to beat inflation, these growth stocks could offer even better opportunities, although fluctuations in their prices can mean they are often high risk.


Whilst generally seen as a safer and less prosperous asset to invest in, bonds do have the ability to outperform inflation in the long-term. Over the past two decades, we have seen the interest paid by UK Government Bonds (GILTs) maintain reasonable value compared to inflation, with short-term GILTs averaging a 2.77% yield annually and medium-term GILTs averaging 3.17% annually2. However, in more recent years, bond yields have been substantially lower and there is no guarantee they will increase to previous levels.

Other types of bonds can offer even higher yields, and index-linked bonds, as the name suggests, generally offer a very effective hedge against inflation in the long term. An index-linked bond is a bond that offers a variable interest rate that moves in line with inflation and is usually linked to an inflation index such as RPI or CPI. However, these bonds are highly sensitive to changes in interest rates and their prices can fluctuate significantly, depending on the economic outlook at the time. 

Real Estate (or property investments) 

Property investment is a popular choice for many investors due to its very real and reliable nature but can be a difficult asset to invest in directly due to the high initial costs. However, with collective property funds, retail investors can access property indirectly, whilst maintaining many of the benefits experienced by investment landlords. 

Real estate investment can be a brilliant hedge against inflation due to the nature of the assets involved and how the investment return is generated. Properties generally provide growth in two ways; through the increase in the value of the properties when they are sold and the rental income they generate from tenants. Historically, property values have increased in excess of the rate inflation as the demand for homes increases, which then has a knock-on effect on the rent they are able to generate. These increases make real estate a good investment to keep pace with inflation, as well as generating income in the long-term.

That said, in recent years there have been some very high-profile issues with investors being able to gain access to collective property funds, so it is important to fully understand the restrictions that can apply and get proper financial advice. 


The term commodity usually refers to raw materials and precious metals, such as gold, copper, and timber, used in the production of goods around the world. However, it can also refer to other consumables, such as energy and gas. Commodity prices are heavily influenced by consumer demand and production requirements across the globe and are therefore linked closely with the prices paid by consumers for the goods and services they provide.

As such, commodities can provide an excellent hedge against inflation and provide a useful diversifier within an investment portfolio. And thanks to the existence of Exchange Traded Funds (ETFs), it is now possible to easily track the price of various commodities accurately and with minimal cost. 

Not all investments behave the same 

Whilst we have named a few assets that help to combat the eroding effect of inflation, there are many other ways to invest and it’s important to remember that not all investments behave the same in different economic cycles. There are benefits and drawbacks to each type and it’s important to have a mix of different investments within a portfolio to reap the rewards of each, whilst reducing the amount of risk you are taking with your money.

Investing for inflation is crucial to maintain the value of your money and possibly even grow it, but it shouldn’t take precedence over your objectives for your long-term wealth. Clearly holding an easily accessible cash buffer is also imperative, but investing your money in line with a clear plan and strategy should be your number one priority.

To find out more about how you can grow your money in line with your long-term plan whilst keeping a head of inflation, why not get in touch with one of our financial advisers and arrange a free consultation today!

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Please note: Investment returns are not guaranteed and you may get back less than originally invested. 


  1. Office for National Statistics – May 2021 CPI Bulletin & Savings Champion – May 2021 Best Buys Sharia Compliant Accounts
  2. DMO – May 2021 Historic Conventional GILT Yields