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Lesson 17: Inflation

11 minutes
Miguel A. Rodriguez
Miguel A. Rodriguez
25 März 2024
Inflation is a scary word to some investors, but it does not have to be. It is a common environment and there could be assets you can use to retain - or even increase - some of your capital.

Inflation erodes the value of money, but several asset classes perform well in inflationary environments. Inflation-sensitive investments are accessed in a variety of ways as both direct and indirect investments. 

How to use this guide 

  1. Understand inflation: Learn what is inflation and how does it impact investing?
  2. Learn how to fight inflation: Find out how to overcome inflation using our guide and learn how to do this using our trading platform.
  3. Create an account and log in: Fill in our simple application form and trade asset classes that perform well in inflationary environments via CFDs. 

What is inflation and how does it impact investing? 

Inflation is when prices of goods and services rise in an economy, meaning it takes more currency to buy the same things. It is associated with positive interest rates as central banks tend to hike interest rates to combat excessive inflation. Some inflation is quite common. Prices, which are measured by the consumer price index (CPI), tend to rise a percent or two per year in many countries. 

If investors make returns that are higher than inflation, then they are making a real rate of return and inflation is not eroding their capital. If their investing strategies make less than inflation — for example, they make 0.25% in a savings account, and inflation is 2% — then their capital is eroded, and they are losing purchasing power in real terms. 

Inflation is not inherently “bad”—in fact, the “optimal” level of inflation for an economy is higher than zero, and investors can stay ahead of inflation over the long run with certain types of investments. Hyperinflation, which is rapidly rising prices, typically by 50% or more per month, is a more severe situation but is extremely rare in developed countries over the last 100 years. 

Inflation occurs because prices chase the money supply. Increasing the money supply creates inflation. Central banks play a role in this by pumping money into the economy during times of economic stress. They do this to help avoid a financial collapse, but at the same time, that money being pumped in can create inflation over time. 

Inflation is an unpleasant fact much of the time. Next, we will look at investment opportunities to stay ahead of inflation, and how inflation affects those investments. 

What investments are typically seen as ‘inflation-proof’? 

What do you invest in during inflation? There are certain investments that perform better during inflation, and that may provide inflation-beating returns. Some will perform better in rising inflation, while others will perform better in steady inflation. Rising inflation is when prices and interest rates are increasing by larger percentages over time (1%, 3%, 5%, and so on). Steady inflation is when prices are increasing the same amount: say 2%, each year. 

Please remember that past performance is not a reliable indicator of future results. No investment is 100% inflation-proof as every type of asset comes with its own risk. 


If inflation is rising, that often means commodity prices will be rising because they are direct inputs into many other products. Commodities include cocoa, coffee, oil, natural gas, sugar, corn, precious metals, and so on. 

Commodity prices are often (but not always) tied to inflation. If inflation is rising, commodity prices tend to rise, producing returns to hedge or beat inflation. When inflation is steady, commodities may not necessarily be under upside pressure. Therefore, some may look to commodities like gold and oil in ETFs when inflation/interest rates are trending higher. 

Gold has a history of being an inflation hedge; sometimes it works, sometimes it doesn’t (read more in our guide to gold investing). Oil tends to have a better track record of moving higher as interest rates/inflation move up as it benefits from the increased economic activity which is sometimes the cause of the inflation (read more in our guide to oil investing). 

With us, you can trade in 18 commodities using CFDs. This enables you to speculate on rising and falling prices using derivatives. 

Stock indices 

Stock indices, such as the USA30, TECH100, or USA500, have previously averaged 7% to 10% per year over the long term. Therefore, they are one of the best inflation-fighting asset classes for passive investing (buy-and-hold). 

Stock indices tend to perform well when inflation is steady. Stock indices tend to struggle more when inflation is rising, especially once interest rates get above 6%, but that is not always the case. Therefore, stocks remain a staple in most investors’ portfolios for beating inflation in a wide range of economic conditions. 

Stock indices include stocks that pay dividends. The return generated by dividends also helps to offset inflation. 

Because there is no underlying physical asset to exchange when trading indices, most indices trading is done with financial derivatives like CFDs. With us, you can trade CFDs on 15 major indices from the U.S., Europe, and Asia.

Consumer Staple Stocks 

Stocks have a reasonable chance of keeping pace with inflation—but when it comes to doing so, not all equities are created equal. For example, high-dividend-paying stocks tend to get hammered like fixed-rate bonds in inflationary times. Investors should focus on companies that can pass their rising input costs to customers, such as those in the consumer staples sector. 

Consumer staples is a sector of the stock market that includes companies providing essential products such as toilet paper, toothbrushes, deodorants, cleaning supplies, and so on. These types of companies are more resistant to inflation since their products are in demand no matter what. They can increase prices on their goods as inflation rises with minimal effect on sales/demand. 

In times of rising inflation, consumer staples may provide a hedge against it. Some examples include Procter & Gamble Co. (PG), Coca-Cola Co. (KO), Wal-Mart Stores Inc. (WMT), Pepsico Inc. (PEP), Estee Lauder (EL), and Colgate-Palmolive Company (CL). 
>> Learn how to trade stocks 

Inflation-linked bonds 

Inflation may inhibit fixed-income investments, reducing their purchasing power and cutting real returns over time – even if the inflation rate is relatively low. 

These bonds could help to hedge against inflation risk because their value increases during inflationary periods.  

Bonds can beat inflation during steady inflation. For example, if you buy a 3% bond and inflation is holding near 2% or below, then that bond offers an inflation-beating return. 

Bonds may underperform if you buy bonds and then inflation or interest rates rise. If inflation rises to 4%, the 3% bond is losing money in real terms. 

Two examples of inflation-linked bonds include UK index-linked gilts and US treasury inflation-protected securities (TIPS). 

Inflation-indexed bonds can be accessed in a variety of ways. Direct investment in TIPS, for instance, can be made through the U.S. Treasury or via a brokerage account. They are also held in some mutual funds and exchange-traded funds. 

>> Learn how to invest in bonds 

REITs (real estate investment trusts) 

Real estate is a popular choice because it becomes a more useful and popular store of value amid inflation while generating increased rental income. 

Over the long-run, real estate prices increase along with steady inflation, often beating it. While the returns vary by region and country, most averages put real estate appreciation at 3-4% per year, which beats low levels of steady inflation. 

If inflation is rising, interest rates rise, and then means people can afford to borrow less to spend on houses than they did before. This tends to push housing prices down. Therefore, real estate or REITs may not perform as well in rising inflation but are good for periods of steady inflation and low-interest rates. 

Rental REITs may be a corner of this asset class that can still perform well in times of rising inflation since rents can be increased to account for higher costs of living during such times. 

Investors can buy real estate directly or invest in it by buying shares of a real estate investment trust (REIT) or specialized fund. 

>> Learn how to invest in real estate 

Pros and Cons of Investing for Inflation 

There are pros and cons to every type of investment hedge, just as there are pros and cons with every type of investment. Also, there are positive and negative features to the various assets described above. 

The primary benefit of investing during inflation, of course, is to preserve your portfolio's value. The second reason is that you want to keep your nest egg growing. It can also lead you to diversify, which is always worth considering. Spreading the risk across a variety of holdings is a time-honored method of portfolio construction that is as applicable to inflation-fighting strategies as it is to asset-growth strategies. 

However, the inflation tail should never wag the investment dog. If you have specific goals or timetables for your investment plan, don't swerve from them. As an example, experts advise not to weigh your portfolio too heavily with TIPS if it requires significant capital appreciation. Also, they advise not to buy long-term growth stocks if your need for retirement income is imminent. An obsession with inflation should never get you out of your risk-tolerance comfort zone. 

There are no guarantees. Traditional inflation hedges don’t always work, and unique economic conditions sometimes deliver excellent results to surprising assets while leaving sure winners trailing in the dust. 

How to trade inflation-beating assets 

Investing and trading are two quite different methods to gain exposure to financial markets. Investors seek returns over the long term through buying and holding, while traders speculate on rising and falling markets over the short term.  

Diversifying your portfolio can be beneficial, as it can limit your exposure to a single type of risk. Your diversification can either be based on asset types, ways to trade, or different industries – to name a few. 

To get exposure to inflation-beating assets on an award-winning trading platform, open an account with us. You’ll get access to our expert trade ideas and round-the-clock support. 

How to trade inflation-beating assets: 

  • Create a CFD account or log in and go to our platform 
  • Select ‘buy’ to go long or ‘sell’ to go short 
  • Set your position size and take steps to manage your risk 
  • Open and monitor your position 

How to fight inflation summed up 

  • Inflation is a measure of the rate of rising prices of goods and services in an economy 
  • Some financial assets are inflation resistants, such as commodities, indices, REITs and specific stocks 
  • You can get exposure to inflation-beating assets on an award-winning trading platform by opening an account with us 

Free trading tools and resources 

Remember, you should have some trading experience and knowledge before you decide to trade in an inflation environment. You should consider using the educational resources we offer likeCAPEX Academyor ademo trading account. CAPEX Academy has lots of courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader. 

Our demo account is a great place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading. 


Are dividend stocks a good hedge against inflation? 

Dividends can provide a hedge against steady inflation, assuming the dividend yield is higher than inflation. But, if inflation is a greater percentage than the dividend yield, then investing in the dividend becomes less attractive. The company itself then must be able to generate returns that can increase the share price to overcome inflation, combined with the dividend. As pointed out above, over the long run, stock indices tend to beat inflation. Learn more about dividend investing. 

Inflation vs stagflation: which is worse for the stock market? 

Stagflation is a worse situation for stocks. Stagflation is increasing prices combined with a sluggish economy and, often, high unemployment. In this type of environment, it may be harder for companies to perform well, and grow sales and earnings. Therefore, stock prices tend to suffer. In times of inflation, assuming the economy is still functioning well, it is easier for companies to perform well and grow. 

What is hyperinflation? 

Hyperinflation describes situations where the prices of all goods and services rise uncontrollably over a defined period. In other words, hyperinflation is extremely rapid inflation and occurs when the rate of inflation grows by more than 50% a month. 

What investments typically perform worst during times of inflation? 

These are assets that struggle during times of inflation and may lose value in real terms. But inflation and interest rates are not the only factors that affect asset prices. Cash is often seen as one of the worst investments during inflation by investors. A short-term investment such as a savings account that pays a small amount of interest will typically be losing purchasing power to inflation. That cash will buy less in the future.  

What are Warren Buffett’s top tips for fighting inflation? 

With prices sharply on the rise, it is worth revisiting some of Buffett’s best suggestions for combating what he once referred to as a “gigantic corporate tapeworm.” 

  1. Invest in good businesses with low capital needs
  2. Look for companies that can raise prices during periods of higher inflation
  3. Look at TIPS
  4. Invest in yourself and be the best at what you do
  5. Avoid traditional bonds
  6. Limit your wants





Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.