Investing During Inflation: Asset Classes and Strategies That Matter

Inflation returned with a ferocity in 2021–2023 that most investors had not experienced in their working lifetimes. Central banks that had spent a decade worrying about deflation found themselves hiking rates at the fastest pace since the 1980s. For investors, this was a painful reminder that the real enemy of compounding wealth is not market volatility but sustained purchasing power erosion. This guide examines how different asset classes behave during inflationary periods, what the 2021–2023 episode confirmed and contradicted, and how internationally mobile HNW individuals can position portfolios for inflation resilience.

Why Inflation Matters More Than Nominal Returns

The fundamental goal of investing is to preserve and grow purchasing power, not to maximise nominal numbers. A 6% nominal return in a 7% inflation environment produces a negative real return; a 3% return in a 2% inflation environment produces a positive one. For investors with significant sterling or euro exposure living in jurisdictions with higher local inflation (common in emerging markets), this dual-currency inflation risk compounds complexity.

Over a 20-year investment horizon, the difference between 3% and 5% real returns is the difference between doubling and more than trebling purchasing power. Inflation management is not an afterthought — it is the central task.

Real Assets: Property and Infrastructure

Real assets — physical property, infrastructure, timberland, farmland — have historically been the most reliable inflation hedges over long periods. The economic logic is straightforward: rents and user charges can typically be repriced with inflation (especially in supply-constrained markets), while the underlying asset retains physical value independent of monetary conditions.

Direct property: UK residential property produced average annual nominal returns of approximately 8–10% in the 2000s and positive real returns over most decades. However, the 2022–2023 period demonstrated that property is not immune to inflationary shocks when inflation is caused by interest rate increases, because higher rates directly increase mortgage costs and reduce buyer affordability. The inflation hedge logic works for property held on long-term leases with inflation-linked rent reviews (such as commercial property with RPI/CPI uplifts), or property owned without mortgage where the income reprices with the market.

Infrastructure: Listed and unlisted infrastructure (toll roads, airports, utilities, renewable energy assets) typically have contractual revenue linkage to inflation — either explicit CPI/RPI indexation or via regulated asset base mechanisms. The 2022 period proved this: while equities fell significantly, infrastructure assets held up relatively well, providing genuine inflation protection at the portfolio level. Listed infrastructure investment trusts (traded on the LSE) provide accessible exposure.

Commodities: Raw commodities — oil, metals, agricultural products — are by definition inputs into the inflation calculation. Energy and metals producers can benefit from rising input prices during an inflation spike. However, commodities are highly volatile, do not produce income, and their inflation-hedging effectiveness depends on the cause of inflation. If inflation is supply-driven (energy shock), energy commodities hedge directly; if it is demand-driven (loose monetary policy), the relationship is weaker. Commodity exposure in a portfolio is best treated as a tactical overlay, not a core position.

Inflation-Linked Bonds

Government-issued inflation-linked bonds — UK Index-Linked Gilts (linkers), US Treasury Inflation-Protected Securities (TIPS), and their equivalents in other developed markets — provide a contractual inflation hedge on the principal and/or coupon.

UK linkers link both coupons and redemption value to RPI. In a rising inflation environment, the real yield on linkers provides protection. In 2021–2022, as inflation spiked, linkers initially performed well; however, the simultaneous sharp rise in real yields (driven by central bank hiking) caused significant capital losses, which partially offset the inflation benefit. This is the key risk: linkers protect against unexpected inflation but are still price-sensitive to changes in real interest rates.

For long-horizon investors (pension drawdown planning, endowment-style portfolios), a meaningful allocation to linkers makes sense as a liability-matching tool. For shorter-horizon investors, the duration risk must be understood.

Equities as an Inflation Hedge: The Mixed Evidence

The conventional wisdom that equities are an inflation hedge rests on the long-run evidence: equities have outperformed inflation over multi-decade periods in most markets. The economic logic — companies can raise prices as costs rise, protecting margins — has theoretical plausibility.

But over shorter periods the evidence is much more mixed. The 2022 equity selloff demonstrated the problem: when inflation is caused by central bank tightening (higher discount rates), equity valuations fall because the present value of future cash flows is discounted more heavily. Growth stocks with cash flows far in the future were particularly badly affected. Value stocks (businesses with immediate cash flows, pricing power, and low capital needs) held up much better.

The key distinction for investors is between commodity-linked equities (energy, mining, agriculture), which hedge supply-driven inflation directly, and long-duration growth equities, which are actually negatively correlated with rising inflation/rates in the short run. For inflation resilience, tilt towards value, real assets exposure (REITs, infrastructure), and commodity sectors rather than broad-market passive exposure.

Gold

Gold's inflation-hedging reputation is long-established but statistically inconsistent over shorter timeframes. The gold price does not track inflation in any precise relationship; the correlation with real interest rates (negative: gold tends to rise when real rates fall and fall when real rates rise) is stronger than the correlation with inflation per se.

In 2022, gold failed to provide the inflation hedge many investors expected, rising only modestly while inflation was surging. This was because the real interest rate was rising sharply (nominal rates rising faster than inflation expectations) — the worst environment for gold. In 2023–2025, with real rates moderating, gold has subsequently performed well, breaking above previous highs.

Gold has a role in portfolios as a safe haven and geopolitical hedge, and provides meaningful diversification, but it should not be the primary inflation-hedging tool for most investors. A 5–10% portfolio allocation to gold and/or gold miners is a reasonable diversification position; more than that is a speculative bet on specific gold price scenarios.

Floating Rate Debt

Floating rate bonds, senior secured loans, and cash deposits all reprice upwards as central banks raise rates in response to inflation. This means that unlike fixed-coupon bonds — which suffered severe capital losses in 2022 — floating rate instruments maintained their income and protected capital. Senior loan funds and floating-rate bond funds performed strongly in 2022 even as traditional fixed income fell by 15–25%.

The risk of floating rate debt is credit risk (the issuer must be able to service higher interest costs) and liquidity risk (senior loans in particular can be illiquid in stressed markets). Investment-grade floating rate corporate paper represents a reasonable inflation-period defensive position.

The Cash Drag Problem

Perhaps the most important inflation lesson for HNW individuals is the cost of holding cash during inflationary periods. In 2021–2022, UK savers with large cash deposits saw approximately 10% of their purchasing power eroded in a 12-month period. The notional security of cash is illusory in an inflation environment; cash is a short-term liquidity tool, not an investment.

The practical implication: keeping more than 12–24 months of planned liquidity requirements in cash is a form of inflation subsidy to borrowers. Excess cash should be deployed into inflation-resilient assets across the categories described above. For HNW individuals with multi-currency portfolios, this applies in the relevant currency of each holding.

Lessons from 2021–2023

The 2021–2023 inflation cycle provided several lessons: (1) the benefits of real assets and infrastructure are real but materialise over years, not quarters; (2) traditional 60/40 portfolios suffered because the bond-equity negative correlation broke down when inflation was the driver of volatility; (3) value equities, energy, and commodity producers significantly outperformed growth equities; (4) floating rate instruments outperformed fixed-income; (5) gold's inflation hedge failed in the short run while central banks hiked aggressively. Portfolio construction that assumes the pre-2021 regime persists indefinitely is poorly prepared for the inflationary risk that may periodically recur.

How Global Investments Can Help

Our investment advisers help HNW international clients build and review portfolios with explicit inflation resilience built in. We take a whole-of-portfolio view across currencies, jurisdictions, and asset classes, and we assess individual holdings against inflation scenarios — not just nominal return assumptions. Speak to our team to review your inflation exposure.