Investing against inflation

4 May 2026

With the global energy shock triggered by conflict in the Middle East sending a ripple effect through financial markets, rising petrol prices pushed inflation in the UK to 3.3% in March. Despite holding interest rates steady at 3.75% in April, the threat of ongoing higher energy prices could force the Bank of England (BoE) to radically rethink its outlook for 2026 and weigh heavy on the UK’s cost of living and potential for economic growth.

Since the COVID pandemic, UK inflation has remained stubbornly above the BoE’s target of 2%, resulting in lasting changes to consumer behaviour – particularly around saving rather than spending or investing. While a cash savings buffer is important for everyone to have, it is key to understand that inflation can erode its real value at a potentially greater rate than other assets over time.

For investors, any prolonged period of higher inflation should be the trigger to understand how inflation can affect the value your investments, and how you might try to mitigate the impact. 

To illustrate how inflation can erode the real value of cash, let’s look at a simple example. If you keep £10,000 in cash earning 0% interest and inflation averages 3% per year, after 10 years the actual buying power of your cash would only be £7,440. Even though the balance remains the same, you’ve effectively lost £2,560 of spending power due to the inflation of prices over time. This will be the case for any rate of interest lower than 3% that you earn on your cash savings.

So, how can this be countered? If your cash were earning interest of more than 3% over the 10 years, you would grow its value above the rate of inflation, therefore increasing its real value. The same logic applies for investments – if the returns you generate remain above the rate of inflation over the period of investment, the value will increase in real terms and be protected from the effect of inflation.

During periods of high inflation, investors should also be aware of standing still: merely maintaining the value of any assets against inflation, rather than increasing it. Instead, they should focus on generating ‘real return’, which is the growth in value over and above inflation.

Now let’s consider the £10,000 used in the previous example as an investment, such as equities. In order to grow the value of the investment in real terms, the returns generated will need to be greater than the 3% rate of inflation. If the investment generates a return of 5% per year over a 10-year period, its ‘nominal value’ (not considering inflation) would be £16,298, but when adjusted for inflation this would be £12,119 as the ‘real return’ is only 2%.

Despite the investment having less value in ‘real’ terms than in ‘nominal’ terms, both are still greater than the buying power of £10,000 cash under the same conditions. As this shows, even standing still requires acting in some way to protect the value of your assets, while growing their value requires greater returns when inflation rates are high.

When trying to protect the value of your assets against inflation, or to avoid the inertia of standing still, many investors aim to build a portfolio where the expected long-term return is above inflation, while managing risk through diversification. A sensible strategy to grow—not just protect—usually involves a diversified portfolio rather than a single bet. For example, a mix of equities with growth potential over time, bonds that can offer income and stability, and potentially property or infrastructure if right for you, with an appropriate cash buffer for short-term needs. As ever, the right blend depends on your goals, timeframe, and risk tolerance for rises and falls in value.

So, even as central banks in Europe, Japan, and the United States echo the UK in holding interest rates steady this month, the prolonged economic shock from conflict in the Middle East could see inflation rates rise further. Whether a saver or an investor, you should assess what rates of interest or return you receive on your assets, and ensure that, even by standing still, you aren’t letting inflation chip away at their potential for growth.