How does inflation affect investments?

Inflation — a general rise in prices — reduces what money can buy. For investments, it means that a return must first beat the inflation rate before it adds any real purchasing power. Beyond that, inflation affects asset classes very differently: some have tended to keep pace with it over time, others lose value when it rises unexpectedly.

Nominal and real returns

The return that matters for purchasing power is the real return:

1 + r_{\text{real}} = \frac{1 + r_{\text{nominal}}}{1 + \pi}

where $\pi$ is the inflation rate. A 5% return with 3% inflation leaves about 1.9% of real gain; a 2% return with 5% inflation is a real loss of about 2.9%.

How asset classes have behaved

Asset class	When inflation rises
Cash	loses purchasing power unless interest rates keep up
Fixed-rate bonds	prices fall as rates rise, and the fixed payments lose value
Inflation-linked bonds	payments rise with inflation protection by design
Stocks	mixed in the short run over the long run, earnings have tended to keep pace because companies can raise prices
Real estate	rents and values have tended to follow inflation over long periods, though higher rates weigh on prices
Commodities and gold	have often risen in inflationary periods, with high volatility

A simple illustration

In a year with 8% inflation, a savings account pays 2% and a stock portfolio falls 15%:

r_{\text{real, cash}} = \frac{1.02}{1.08} - 1 \approx -5.6\% \qquad r_{\text{real, stocks}} = \frac{0.85}{1.08} - 1 \approx -21.3\%

Both lost purchasing power — roughly the experience of many European investors in 2022, when inflation in the euro area peaked above 10%.

Over the long run

Over decades, stocks have historically delivered the highest real returns — around 5% a year for global equities — because companies can pass higher costs on to their customers over time. Cash and conventional bonds have delivered real returns close to zero or modestly positive, with long stretches of negative real returns in inflationary periods such as the 1970s.

What it means for a portfolio

Plan in real terms. Targets and return assumptions should be expressed after inflation.
Cash is not risk-free in real terms. Holding large amounts for many years loses purchasing power whenever interest rates trail inflation.
Diversify across inflation outcomes. A mix of stocks, inflation-linked bonds and real assets is more robust than a portfolio that relies on only one of them.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

How does inflation affect my portfolio?

How inflation affects your portfolio now.

Asset class	Value (€)	Weight (%)
Stock	62.593,70 €	45,01%
ETF	59.448,20 €	42,75%
Crypto	9.020,47 €	6,49%
Cash	8.000,00 €	5,75%

Cash: you hold 8.000,00 € (5,75% of the portfolio). Inflation reduces the purchasing power of cash over time — the nominal euro amount stays the same, what it buys falls as prices rise.
Nominal vs real returns: your reported total return is +94,64%. Inflation subtracts from nominal returns to give real returns (real return = nominal return minus inflation rate), so persistent inflation lowers the real growth you keep.
Equity / ETF exposure: your portfolio has large allocations to stocks and ETFs (see table). Equities and broad-market ETFs often keep pace with inflation over long horizons, but higher inflation can increase interest rates and pressure valuations—sectors that rely on long-term discounted cash flows are more sensitive.
Inflation-sensitive parts: Technology is 29,24% of your portfolio; crypto is 6,49% (9.020,47 €) and is highly volatile. Gold and commodities (where present) can move differently from stocks and cash when inflation rises.
Practical takeaway: inflation mainly erodes cash purchasing power and reduces real (inflation-adjusted) returns; its impact on other holdings depends on asset type, sector exposure and volatility in your portfolio.

If you’d like, I can run a simple inflation scenario (pick a rate and a timeframe) and show the hypothetical effect on value and real returns.

See these numbers for your own portfolio

Floreo works out every figure on this page from your own holdings — returns, risk, allocation, currencies — and the assistant explains them the way this page does. Import from your broker, or try it on the sample portfolio first.

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