Impact of inflation on investments

Navigating effectively through inflationary periods

Inflation, the general increase in prices and fall in the purchasing value of money, is a critical factor that investors must consider. It’s particularly relevant in the current economic climate in the UK, where inflation rates still remain high.

Very high inflation tends to have a negative impact on assets such as stocks and bonds. As the prices rise, the purchasing power of money falls, which means the real value of cash savings decreases over time. However, some investments may fare better than others during inflationary periods.

The effect on savings
Rising inflation creates uncertainty, which can be detrimental to your savings. High inflation can mean that your cash in the bank will lose value over time. Investing your money over the medium to long term may provide a better chance of beating inflation.

Inflation isn’t only a domestic issue. Rising commodity prices, including oil, have recently led to upward inflationary pressures globally. This global inflationary trend can impact the performance of international investments, adding another layer of complexity for investors.

Rethinking investment returns
With inflation remaining high, investors need to rethink their expected returns, taking into account ‘real’ returns – that is, the return after inflation. If inflation remains high, the ‘real’ return on investments could be lower than anticipated, which may prompt a reassessment of investment strategies.

While inflation presents challenges, it also offers opportunities. By understanding the impact of inflation on different types of investments and adjusting strategies accordingly, investors can navigate effectively through inflationary periods.

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