How to invest during high inflation: the strategies that hold up

Topic: Investment · Type: Evergreen · Reading time: ~8 min

The average annual US inflation rate from 1976 through 2025 was 3.6%. Over a 30-year retirement, that turns a purchasing power of €100,000 into roughly €34,000 in real terms — without a single bad investment decision. The erosion is quiet, steady, and largely ignored until it isn't.

When inflation spikes above that historical average — as it did in 2022, hitting 9.1% in the US and topping 10% across much of Europe — investors scramble. The advice that floods in is usually a mix of gold, commodities, and panic-driven reallocation. Most of it isn't wrong, exactly. But it's incomplete. The question of how to invest during high inflation has a more nuanced answer than any single asset class can provide.

Here's what decades of market data actually show.

The first thing to get right: what inflation does to different assets

Inflation doesn't hurt all investments equally. The damage depends on whether an asset's cash flows are fixed or flexible.

A traditional bond paying 3% annual interest looks fine until inflation runs at 5% — at which point you're losing real purchasing power every year while technically earning money. This is why the 2022 rate-hiking cycle devastated bond portfolios. Long-duration bonds fell 25–30% in value in a single year, a loss that shocked investors who had held them precisely for "safety."

Equities, by contrast, have a built-in mechanism that bonds lack: the companies behind them can raise prices. When input costs rise, most businesses pass those costs downstream. That's literally how inflation works — prices rising because sellers can charge more. This is why, going back to 1926, the annualized inflation-adjusted return on US stocks has been approximately 7%. Even in the decade of the 1970s — perhaps the most inflationary in modern American history — the S&P 500 averaged a nominal return of around 9.4% annually. Lower in real terms, yes, but not a disaster.

The counterintuitive implication: if you're primarily a long-term equity investor with a globally diversified portfolio, you may not need to do much at all. Staying the course has historically beaten most tactical inflation-hedging moves.

But that's the long view. Short-term inflation — especially when it arrives with rising interest rates and genuine economic uncertainty — creates specific vulnerabilities worth addressing.

What actually holds up: the evidence

Equities with pricing power. Not all stocks are equivalent inflation hedges. The ones that hold up best share a common trait: they can raise prices without losing customers. Consumer staples — food, beverages, household products — have demonstrated this repeatedly. During 2025, when inflation concerns returned as a headline risk, sectors like utilities and financial services outperformed the broader market while technology stumbled. Morningstar's Dividend Leaders Index climbed 6.5% year-to-date in 2025, more than double the broader market's 3.0% gain — a direct result of investors rotating toward pricing-power stocks and dividend growers.

Energy is the most direct pass-through: oil and gas prices feed into the CPI itself, so energy companies often see revenues rise roughly in lockstep with the inflation they're contributing to. Exxon Mobil returned over 80% in 2022, the year inflation peaked, while most of the market declined.

Worth knowing: Dividend growth matters more than dividend yield during inflation. A stock yielding 5% with flat payouts loses real income every year. A stock yielding 2.5% that grows dividends at 6–8% annually keeps pace — and then some. From 1940 through 2025, dividends contributed an average of 33% to total S&P 500 returns.

TIPS: the clean, underused tool. Treasury Inflation-Protected Securities (TIPS) are government bonds whose principal adjusts automatically with the CPI. If inflation runs at 4%, your principal grows by 4%. They're not flashy — typical real yields hover around 1–2% — but they do what they promise: guarantee a return above inflation. That's a promise no stock, gold bar, or crypto token can make. TIPS work best inside tax-advantaged accounts (pension wrappers, ISAs in the UK, ETF-based equivalents available across Europe and globally) because the inflation adjustments are taxed as ordinary income in many jurisdictions — a detail most guides skip.

For European investors, eurozone inflation-linked bonds (OATi in France, BTPei in Italy, or funds tracking them) serve a similar function and avoid the currency risk of holding dollar-denominated TIPS.

Real assets: REITs and infrastructure. Real estate has historically kept pace with inflation because rising prices flow through to rents and property values. You don't need to own property to access this. REITs — real estate investment trusts — are listed companies that own income-producing properties and are required to distribute the majority of their income as dividends. Industrial and logistics REITs (warehouses, data centres, cell towers) have shown particular resilience because their assets are in high demand and their leases often contain inflation-escalator clauses that automatically adjust rent upward with CPI.

Infrastructure is similar: pipelines, utility grids, toll roads, and water treatment facilities tend to operate under long-term contracts with inflation-linked pricing. Brookfield Infrastructure, to take one example, grew its dividend 6% in early 2026 — its 17th consecutive annual increase — precisely because its cash flows are structurally indexed to inflation.

Short-duration bonds and high-yield cash. Long-duration bonds are the primary casualty of rising rates. Short-duration bonds are far less sensitive to rate changes and reprice more quickly. In inflationary environments, keeping the fixed-income portion of a portfolio in shorter maturities — 1–3 years — limits exposure to the price erosion that crushed longer bonds in 2022. High-yield savings accounts (offering 3.5%+ from reputable banks as of late 2025) and money market funds are also legitimate options for money you might need within 1–3 years, precisely because their rates adjust upward as central banks raise them.

The gold question (and why the data is messier than the narrative)

Gold gets elevated to mythic status in every inflation panic. The reality is more complicated.

Over the past five decades, the S&P 500 has substantially outperformed gold as a long-term inflation hedge. Gold fell nearly 60% in real terms from 1980 to 2000, even as inflation was gradually coming under control — the very environment it's supposed to protect against.

Gold's correlation with CPI is only about 0.16 on a rolling five-year basis. It doesn't mechanically track inflation. What it does track, more reliably, is real interest rates and geopolitical anxiety. When real rates turn negative (nominal rates minus inflation falls below zero), gold typically performs well — because there's no opportunity cost to holding a non-yielding asset. Commodities, by contrast, have outperformed inflation in five out of five measured high-inflation periods in Morningstar's analysis, while gold fell behind in two of those five. Broad commodity exposure through an ETF or fund is a more consistent inflation hedge than gold specifically — though both come with meaningful volatility.

The honest position on gold: a small allocation (5–10% of a portfolio) makes sense for investors who want protection against currency crises or extreme tail risks. It is not a substitute for a well-structured portfolio. And as of 2026, with gold having risen over 300% since January 2016, the entry point matters more than it once did.

What doesn't work (and why people keep doing it anyway)

Cash is the single worst place to hold money during high inflation. The logic feels counterintuitive because the number in your account stays stable — but a hypothetical investor who held cash through the early 2020s inflation spike watched their purchasing power quietly fall by double digits. Moving to cash to "wait out" inflation almost always makes things worse.

Panic-driven reallocation is nearly as damaging. Fidelity analysis found that an investor who missed just the five best trading days over a 35-year period would have reduced their portfolio's value by 37%. Those best days tend to cluster around periods of maximum fear — exactly when cash-heavy investors are sitting out.

The J.P. Morgan Private Bank's inflation analysis from 2025 offers a useful framing: when inflation — not growth dynamics — is driving the market, traditional bonds lose their role as shock absorbers. Stocks and bonds start to move together rather than opposite each other, as they did in 2022. That's when you need genuine diversifiers: real assets, commodities, inflation-linked bonds. Not because they outperform equities, but because they don't correlate with the same risk factor.

What this means for your portfolio

The right response to high inflation isn't to abandon a long-term strategy built on index funds and broad diversification. It's to audit your existing portfolio for inflation vulnerabilities and address specific gaps.

Concretely, that means asking a few questions:

Do you have meaningful bond exposure in long-duration funds? If so, consider whether some of that should shift to short-duration or inflation-linked alternatives.

Are the equities you hold concentrated in companies that can't raise prices — those with fixed revenues, regulated pricing, or customers who will defect at the first increase? If so, that's a genuine vulnerability.

Do you have any real asset exposure — REITs, infrastructure, or commodity-linked funds? For most investors, even a 5–10% allocation to this category provides meaningful portfolio diversification and inflation resilience.

The most durable answer to investing during high inflation is one that was true before inflation became a headline concern: own a diversified mix of assets, favour those with genuine pricing power or inflation-linked cash flows, and stay invested. Timing the inflation cycle has not historically worked. Understanding what you own — and why — has.