What to Invest in During Inflation

A person is weighing different investment options during inflation

Inflation is a fact of life in the national and global economies. We can’t say that we “always” live in inflationary times, but we certainly can say that inflationary periods are very common. Historians believe that even the early Roman Empire suffered from inflation. In modern history, some of the most severe cases included the German hyperinflation crisis of 1923, and more recently, we’ve seen extreme inflation in Venezuela, Yugoslavia, and Zimbabwe.

Admittedly, these are extreme cases, and we’re not predicting a return to these levels among the industrial countries, but more “normative” inflation periods can still do damage. The US saw a 14.6% inflation rate in the 1980s and experienced an 8% average inflation rate in 2022.

The evidence is overwhelming that inflation is unavoidable; it won’t always be with us every year, but it will never go away completely. You have to plan for it. Fortunately, adjusting your financial strategy to account for inflation will help to provide better results and avoid losses in the purchasing power of your assets.

Keep reading to learn more about inflation and its effects on investments and the broader economy. Then, find more information about what to invest in during inflation.

Key Takeaways

Table of Contents | Where to Invest During Times of Inflation

What Is Inflation? How Does It Affect Economic Activity and Investments?

Inflation occurs when the prices of goods and services in an economy generally rise. We typically measure inflation by the consumer price index (CPI), which reflects this “general” level of prices. This broad measure is important because rising prices in one sector of the economy, or even a couple of sectors, are not inflation. At any given time, there can be competitive reasons why the prices for some products or services are increasing or decreasing.

When conflicts in the Middle East threaten oil shipments, the oil supply is reduced, and the price of oil increases. But when that happens, we don’t necessarily see the price of coal or nuclear power increase. Similarly, the prices for beach gear increase in late spring and usually stay high during the summer, but those prices crater as fall kicks in. These are all examples of specific price changes due to changes in the supply and demand of specific products or services. They are not general increases in all prices across the economy.

Inflation affects the overall economy in several ways. The economist John Rutledge explained that inflation is like fog on a highway; it forces everyone to slow down because of the lack of visibility. The more fog, the slower drivers go.

If we apply this analogy to our economy, inflation reduces the ability of business owners, managers, and even consumers to plan effectively for the future. If you’re unsure whether a new factory will be profitable because inflation is clouding your analysis, you’re less likely to build that factory. Factories employ people; if they aren’t built, then fewer people are employed.

Increasing inflation increases uncertainty, retards investment, and restricts growth. Decreasing inflation eliminates that uncertainty, promotes investment and drives growth upward.

Beyond the uncertainty factor, rising inflation creates winners and losers arbitrarily. Ideally, in a well-functioning economy, companies and people who are producing a desired service at a reasonable price and earning an appropriate profit should be rewarded. Those who are producing a flawed product/service, haven’t priced it correctly, or can’t generate a profit will be weeded out in favor of those who can. This scenario is healthy, promotes growth, lifts incomes across the spectrum (the wealthy and poor alike benefit), and increases the size of the nation’s economy.

Inflation Losers

Inflation hurts people on fixed incomes. It drives costs up, but a fixed income means that the person cannot purchase as many products and services as they could beforehand. Retirees on fixed pensions are especially vulnerable. Their income will no longer allow them to pay increasing rent or buy enough food or clothing.

Inflation also hurts banks or others who have lent money at fixed interest rates. It decreases the value of the money they receive in repayment.

Inflation also hits investors who have large amounts of fixed-income investments. Investors with fixed-rate bonds are a primary victim. Inflation reduces the value of their bonds and the income coming from them.

Inflation can devastate companies that have to quote prices a long time in the future. Once they quote a price and their customer accepts it, that company has to produce and deliver the product at the quoted price. Inflation increases the company’s costs of producing the product, and if the price cannot be adjusted, then profits suffer.

Companies adjust prices during inflation, of course, but the longer it takes a company to change prices to reflect inflation, the harder inflation hits their profitability.

Inflation Winners

Inflation favors borrowers who have fixed-rate loans. It allows them to repay their loans with money worth less than the borrowed money.

Inflation typically favors existing landowners and landlords. Since they already own their land and buildings, these costs don’t increase. However, inflation usually allows them to increase rental and lease rates, which increases their profitability.

Businesses with fixed costs or the ability to increase prices immediately are better suited to beat inflation. These companies can either easily maintain their profit levels during inflation or increase profits where their fixed costs are.

Inflation’s Effects On Your Investment Portfolio

Inflation affects investments similarly to how it affects the overall economy, as described above. It can elevate certain investments (winners) and decimate others (losers). If you own a concentration in any of the types of companies listed above as “winners,” then you should see the value of your stock increase with inflation. On the other hand, if you own concentrations in any of the types of companies listed as “losers,” you should expect to see your stock values decrease.

It is extremely important, therefore, to recognize periods of high inflation from a financial planning perspective. You need to assess how inflation will affect your living expenses and also your retirement savings account, which you need to meet those rising living expenses. If you don’t learn how to deal with inflation in retirement, assess these impacts, and adjust your financial planning accordingly, the odds of failure are substantial.

At one level, you can judge all financial plans by a fairly simple metric: does the plan reasonably show that your retirement portfolio will allow you to meet rising living expenses during inflation AND also show that the retirement portfolio itself is keeping up with inflation? To put it simply:

If you have $1,000,000 today generating $50,000; you’ll need $2,000,000 generating $100,000 in 24 years just to stay even with a 3%/year average inflation rate.

On the investment side, properly determining and maintaining an appropriate asset allocation among the right asset classes is critical to keeping the portfolio even with inflation. You will never be able to time the markets or which asset classes will do better this month vs. next or even this year vs. next. You must include all the relevant asset classes in your asset allocation.

This strategy must go beyond just simple bonds vs. stocks; you’ll need to include a certain amount of real estate investments and alternative investments in your portfolio and avoid these common retirement planning mistakes.

Potential Investment Options In Times Of High Inflation

Prospective clients often ask us how they should change their investment strategy to respond to high inflation. The answer is that they may not need to.

They shouldn’t change their strategy if they’ve already crafted the right investment plan. The right investment plan implicitly assumes there will be periods of moderate and high inflation, and it contains investments that can thrive during an inflationary cycle.

As we’ve written above, “winner” investments will rise in value during inflation; “loser” investments will fall in value during inflation. While certain asset classes are better than others during inflation, there are only a few that you should emphasize. You cannot successfully pick large stocks vs. small stocks, value stocks vs. growth stocks, or international stocks vs. domestic stocks as better hedges against inflation.

These asset categories are very important and should be part of almost every investment portfolio. But you cannot ping back and forth between these asset categories successfully. The research is overwhelming that such market timing will inevitably fail.

On the other hand, you can emphasize shorter-term bonds instead of longer-term bonds during the beginning of an inflationary cycle. This doesn’t mean that you abandon bonds. Again, bonds should typically be part of almost every portfolio. The decision between short-term and long-term bonds can be critical.

As inflation starts and the market (along with the Federal Reserve) begins raising interest rates, the value of existing long-term bonds will decrease. And this decrease can be substantial with rising interest rates. Once we’re in the middle of an inflationary cycle – close enough to see that the Fed is having some success in taming inflation – then shifting back toward a better balance between short and long bonds makes sense.

The key to successful investing during high inflation lies in the specific stocks and bonds you own within each asset category. In other words, you might be unable to determine whether a large US growth company will perform better than a large US value company. However, you can determine whether a specific company will do well during inflationary times.

Warren Buffet has earned his reputation as one of the most successful investors in the modern era and perhaps across all eras. His insights into which companies will survive or even thrive are instructive. He said that these companies must have two characteristics:

1. An ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume.

2. An ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital.

These insights are great investment advice during inflationary times, but they are also great advice for the post-inflation period. When inflation finally ends, these same companies will continue to do well. They are positioned for success in a variety of market and economic conditions.

As Buffet implements this philosophy, he and his team evaluate specific sectors, industries, and, of course, individual companies to determine which meet the criteria. For example, several industries are noted for having pricing flexibility, while others have very little pricing flexibility. Knowing the criteria is one thing; implementing them is an altogether different matter.

While the concept is simple and true, implementation is difficult because of the complexity of conducting that analysis across sectors, industries, and companies; it’s not enough to just get the sector or industry correct. Even within “correct” industries, there will be well-managed and poorly-managed companies.

Secondarily, and probably more important, legions of professional money managers devote all their working hours to identifying these types of companies, determining what price to pay for their stock, and when to sell their stock to move to a potentially better company. The average investor will never be able to compete against them and win this game. It is worse than going to Vegas and hoping to successfully beat the house.

That doesn’t mean you’re frozen out of investing in these types of investments. Quite the contrary. There are a good number of successful money managers who run low-cost mutual funds or ETFs. By investing in those funds, the average investor can take advantage of the insight, skill, and expertise of the best fund managers and ETFs. This is where investors should focus.

That doesn’t necessarily make it easy. There are several really good money managers – managers who would use the principles highlighted by Warren Buffet. But there are a lot more money managers than just the good ones. Picking the right manager or index is critical to success in any time period or market phase, especially during inflationary times.

One other aspect also needs to be considered. Warren Buffet works in a very unique niche. He is not only acting as a money manager in the sense of picking investments he believes will prosper but also in deciding what asset allocation he wants to use. That decision will be unique for each investor. How Warren Buffet spreads his investments across large companies, small companies, domestic vs. international companies, etc., is most likely not the best allocation for you.

Relying on Warren Buffet to pick your asset allocation is like entering a high-end shoe store where you can’t see the sizes marked outside the box. You know that each pair of shoes will be high quality, made well, etc., but the odds of picking the pair of shoes that fit your foot and meet your needs (casual, leisure, formal, etc.) are slim to none.

Best Ways to Invest During Times of Inflation

The best way to invest during times of inflation is to design an asset allocation that:

Only after you’ve determined which asset allocation best suits your situation should you even contemplate finding the best money managers, ETFs, and index funds.

Putting that all together requires a significant amount of analysis and access to the right data; there’s a lot of “noise” out there – lots of miscellaneous unimportant information masquerading as important. You have to be able to cut through the clutter and then analyze the right data. Fortunately, there’s help. Fiduciary advisors who provide 100% objective guidance can make this job easier and more successful.

Let The Professionals Help You

Inflation will always be with us; maybe not every year, but across a long enough investment horizon like retirement), you will experience significant inflation rates. Even at the post-WW2 average of 3%/yr, inflation will ravage an unprepared portfolio.

Think of it like an infection. There are mild infections, which you can probably handle with a dab of antiseptic and a band-aid. Unfortunately, there are more serious infections, which first appear insignificant or mild. However, left untreated by a professional, they can worsen to the point of causing serious health risks or becoming terminal.

Common sense has taught us all to seek professional medical assistance and given us perspective to know when the professional is needed. We know the difference between a slight scratch and something else. Most people do not have that perspective when it comes to inflation. Somehow, we view 3% as small (because it is in most instances) and treat it like a scratch. But 3% inflation is not “small.” 3%/yr average inflation will cut the real value of your retirement savings in half during the average American’s retirement.

Recognizing inflation as a serious infection of your retirement savings account and immediately getting professional help is critical. Every day you delay is one more day of financial deterioration. Find a fee-only, 100% objective fiduciary advisor to help you structure your retirement portfolio to survive and even thrive during inflationary economic downturn and to meet your specific needs, tolerances, and liquidity demands.

“Fee-only, 100% objective, fiduciary” sounds like a word salad. Sadly all those words are needed to define who really can help you. The financial services industry is chock full of “advisors” who use one or more of these words to create the illusion that they will always serve your best interests.

The reality for most is that they use that illusion to sell you the financial product that pays them the best commission. The outcome is so important that you must find an advisor who will always serve your best interests. That advisor is a fee-only, 100% objective, fiduciary advisor. That advisor will be able to design and implement the right investment structure for you that protects you during periods of high inflation.

First Financial Consulting has 45+ years of experience in this exact role. We have helped hundreds of clients prepare for and now enjoy a successful retirement even as inflation rages around them. We would love to start a conversation with you to determine how we can help; these initial consultations are complimentary. Please give us a call, send us an email, or use the link below to schedule your complimentary consultation.

Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.

Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.

FAQ | Investing During Inflation

What is inflation, and how does it impact investments?

Inflation is a general increase in the economy's prices of goods and services. It causes a decline in purchasing power, which decreases one's living standard and erodes the value of one's investments. You can't stop inflation, but you can stop it from hurting one's investments.

Which sectors can be effective for investment during high inflation?

Several sectors have historically shown resilience during inflationary times. The problem with "naming" them is the impression that investing in those sectors automatically protects you. Unfortunately, that's not a reliable truth. Within any sector or industry, you'll find well-managed and poorly-managed companies. The combination of sector, industry, and company management generates resiliency in the face of high inflation.

Can commodities play a role during inflation increases?

Commodities can help when inflation increases, but they can quickly turn around and cause significant damage as perceptions of inflation change. Commodities are extremely volatile, which can easily do more damage than inflation ever would.

What are TIPS, and how do they offer protection against inflation?

TIPS, or Treasury Inflation-Protected Securities, are government bonds that offer protection against inflation by adjusting their principal value based on inflation. They seem to be an excellent hedge against inflation, but since they are publicly traded, their price can also reflect unreasonably assumed future course of inflation; they can be overpriced and hurt your portfolio more than they help it.

How can investment strategies be adjusted during high inflation?

Whether we are in an inflationary period or in between one, your portfolio should be "adjusted" for inflation in the sense that it should ALWAYS be prepared for inflation. If it is, then no real adjustment is needed. If your portfolio is not prepared for inflation, then whatever phase we're in, you should seek professional and 100% objective advice to make adjustments to restructure your portfolio so it will succeed despite high inflation and rising interest rates.

Understanding Annuities

Financial Guide


Recent Posts

Ready to Talk?

Let’s schedule a time to learn about your needs and retirement plans.

Ready to Talk?

Let’s schedule a time to learn about your needs and retirement plans.


Download our

Financial Planning Guides

Understanding Annuities

We are committed to helping families make wise decisions among all the competing priorities they face.

Saving for College

The sooner you start saving for college, the better positioned you will be to greet that big day with enthusiasm, not dread.

Preparing for Retirement

Retirement should be as active and rewarding, and you shouldn’t have to worry about your situation.