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  • Inflation

    We look at the basics of inflation, explain what investors and savers could do to try to beat inflation, and offer three fund ideas.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Current UK inflation rate

    Source: Office for National Statistics.

    In light of rising inflation, it is vital to consider inflation in your current and future investments, it affects our everyday lives and is very significant to us all.

    The main reason we invest is simple – to make a real return. By real, we mean a return that’s higher than inflation. This means your money isn’t losing value if it’s beating inflation, it’s growing.

    Every investor needs to understand what inflation is, and the impacts that come with it.

    This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice.

    What is inflation?

    Inflation is the rate at which money loses its value over time, which is another way to say, it’s the rate at which the prices for goods and services go up. It means money today buys you more than the same amount of money next year.

    The price you pay for a basket of goods, things like milk and bread, or the cost of filling up at the petrol pumps becomes more expensive over time - that’s inflation. And, when it rises at a faster rate, these costs become more noticeable.

    Here's how inflation has changed over the decades.

    Source: Office for National Statistics, 22/03/2023.

    This is how inflation can affect the future value of £100 today at different rates.

    Annual inflation Real value today Real value of £100 in a year’s time Real value of £100 in two years’ time
    2% £100.00 £98.00 £96.04
    5% £100.00 £95.00 £90.25
    10% £100.00 £90.00 £81.00

    So, where does investing come in?

    Investing in the stock market has historically been the best long-term option to keep pace with, or even beat, inflation. The latter is what’s known as a real return.

    Let’s look at an example.

    If your investment grows by 5% and inflation is at 2%, you’ve made a net gain of 3%. Importantly, it means you’ve made a real return – the value of your money has outpaced inflation and is now worth more.

    However, it works the other way too. Let’s say your investment again grows by 5%, but this time inflation is at 10%. Technically your money is losing value, it’s losing 5%. It’s now making a negative real return and is worth less than before, even though you have more pounds in your investment account.

    What about cash savings?

    Inflation can devastate your savings, especially if you only save a small portion of your monthly income. So, if you don't save as much as you can, it potentially puts you in a vulnerable position.

    Boosting your savings now is a great way to help towards preserving the value of your personal wealth in the years ahead.

    One option to hone your hard-earned cash is HL’s online savings platform, Active Savings.

    With Active Savings, you’ll no longer have the hassle of opening, closing and transferring your savings between different banks and building societies.

    Once your account is open, you can pick and mix savings products from a range of banks and building societies which offer some of the best rates on the market, without ever having to fill in another form.

    There are a range of products and terms to choose from, and you can have as many as you like.

    It’s important to note though, even the best savings rates on the market aren’t currently keeping pace with inflation. This means the purchasing power of your money will be eroded.

    See the difference a new rate could make to your cash with our savings calculator.

    More on Active Savings

    How to calculate the impact of inflation

    Use our inflation calculator to see the effect of inflation on the real value of your savings and the growth rate you would have needed to keep pace with inflation.

    Show me how much:


    is equivalent to in today's money

    Today* £4,476
    January 1948 £100
    • The cost of goods and services increased by 4375.9% over this period.
    • Your £100 would need to have grown by an average of 5.2% per year, just to have kept pace with inflation. If you achieved a lower rate of growth, the real value of your money would have fallen.
    • *Figures based on the Retail Price Index (RPI) as at May 2022. Source: Office for National Statistics.

    Investing with inflation – why it matters to investors

    Inflation will go through peaks and troughs. Some years it’ll be high. In others, it’ll be much lower.

    Some will remember the era of double-digit inflation, but over the years we’ve got used to much lower inflation.

    In recent times though (since the start of the pandemic), inflation has gradually been rising around the world.

    The return of record-breaking inflation is unwelcome news for investors. It’s made things more difficult for investors to earn a real return. You risk losing money in real terms if your strategy doesn’t take this into account.

    While inflation is a worrying sign for us all, it should act as an opportunity to broaden your investments into areas which have tended to do better when inflation is higher. This’ll add an extra layer of diversification to your portfolio which is a good thing for any investor.

    Holding too much of what has performed well previously (when inflation was low) could seriously impact how much your investments will be worth later down the line.

    Learn more about diversification

    How to shelter your portfolio from inflation

    Some investments have tended to weather inflation storms better than others.

    When inflation hits, we often expect to see ‘growth’ shares suffering the most. These companies are expected to grow a great deal with the hope they’ll reward investors with profits in the future. So, when high inflation erodes the future value of those profits, they become less attractive to investors which can cause share prices to tumble.

    The opposite to growth is ‘value’. Value shares often become more attractive to investors when inflation spikes. Why? Lots of these companies are earning profits today, instead of tomorrow. So, the impact of inflation is smaller.

    A lot of these value-style companies are household names too. This means it’s easier to pass on rising costs to consumers, so their profits can rise with inflation.

    Looking at other investment types, bonds suffer when inflation rises. A bond usually pays a fixed amount of interest for a set period. Inflation erodes the future value of the payments and therefore, they become less attractive. Interest rate rises typically follow in the footsteps of inflation, which have tended to shake bond markets.

    Alternative investments, such as commodities (for example gold, oil, and coffee), have normally held up better in an inflationary world.

    What should investors consider?

    While some investment types have tended to hold up better than others, it won’t be like that forever. Higher inflation doesn’t call for you to abandon certain investments, like bonds, just because they’re in for a bumpier ride. Or to pile into ones that have tended to hold up better in the past.

    While it can be interesting to look at how different sectors and investments have reacted to periods of high inflation in the past, every period in history has a unique set of circumstances. That means we can’t use them as a guide to how they’ll perform in the future.

    When investing for the long term, it’s important to hold a well-diversified portfolio across various investment types, styles, sectors and geographies. By diversifying, you should always have some investments performing well through the economic cycle, where inflation rises and falls.

    If you’re not sure where to start, our research team have put together some investment ideas that could help beat inflation.

    3 fund ideas to help beat inflation

    A simple way for investors to access a diverse range of investments is through funds.

    Lots of funds have performance objectives based on the returns of a specific type of investment – for example, a UK share-focused fund might aim to do better than the FTSE All-Share index of UK companies.

    Other funds focus on areas like global shares, global bonds, or particular regions like emerging markets. There are also some passive funds that let you invest in inflation-linked investments.

    While a range of investments can outpace inflation over time, certain funds specifically aim to beat inflation over the long term. Like some total return funds.

    Total return funds typically invest in a mix of investments including shares, bonds, commodities and currencies. They’re more conservative than funds investing fully in shares. This means they’re unlikely to keep up with stock markets when they rise quickly, but they’re more likely to offer some shelter when shares fall in value.

    Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio. Investments rise and fall in value, so you could get back less than you invest.

    Troy Trojan

    Wealth ShortlistWealth Shortlist
    • Made up of a mixture of different investment types
    • Investments from around the world
    • Could bring some stability to a more adventurous portfolio

    Baillie Gifford Sustainable Income

    • This fund combines company shares, infrastructure, REITs, bonds and cash to help deliver an income alongside long-term growth
    • The focus of the fund is on providing a resilient level of income for today and into the future
    • The fund places a big emphasis on responsible investing and all investments are made on the basis that they are compatible with a sustainable economy

    First Sentier Global Listed Infrastructure

    • Mainly invests in companies that own or run infrastructure assets, including utilities, transport and energy
    • Made up of high-quality companies the managers believe can be bought at a lower share price than their true worth
    • A reasonable option for investing in some of the world’s most promising infrastructure companies

    This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.

    The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960), which is authorised and regulated by the Financial Conduct Authority with firm reference 915119. Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

    Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Current UK inflation rate

    Source: Office for National Statistics.