How Does Inflation Affect Investments

How Does Inflation Affect Investments? (Fine Wine, Stocks & Others)

by Elaine Lau

With a 40-year high inflation rate in the USA, you might be wondering, how does inflation affect me? Or, how does inflation affect investments in general?

Inflation silently erodes your wealth and investments by decreasing the purchasing power of your money. But, seasoned investors readily take advantage of this by investing in assets that tend to grow or outperform inflation. 

Let’s discover what inflation is, how it's controlled, how it affects investments, and the pros & cons of investing for inflation. We’ll also cover why fine wine is the ultimate inflation-proof asset and how Vinovest can help guard you against inflation.

Further reading

What Is Inflation?

How Does Inflation Affect Investments

Inflation is the average rise in the cost of goods and services over time. 

It's primarily measured by the Consumer Price Index - which tracks the price of a basket of goods over time.

In the long run, it decreases the purchasing power of your income and investments. To counteract inflation, you need to ensure your investment grows with (or more than) the inflation rate.

But what causes inflation?

There are two leading causes of inflation - too much demand and increased costs.

  • Demand-pull inflation: Demand-pull inflation occurs when the demand exceeds the available goods. Since the demand is high and availability is low, people are willing to pay more, making goods harder and more expensive to obtain. 
  • Cost-push inflation: Cost-push inflation occurs when overall prices increase due to increases in the cost of raw materials or labor. For example, an increase in oil price will increase the production costs of all the products that have oil as a raw material.

So, if a rising Consumer Price Index leads to increased prices, your investments must generate a higher return to maintain your wealth. 

For instance, if you invest a principal amount of $100 in a savings account with a 2% interest rate per month, your potential return and the accrued principal is $2 for the first month. If inflation increases to 4%, you’ll still receive your $2, but everything else is 4% more expensive than it was a year ago. So, your inflation adjusted return is negative 2%.

But inflation isn’t always bad news, and governments try to maintain healthy levels.

How Do Governments Control Inflation? 

How Does Inflation Affect Investments

Inflation indicates economic growth, and most countries around the world target a 2% long term inflation rate. 

Here are the 2 main ways governments reduce inflation rates.

  • Fiscal Policy: Fiscal policy involves governments raising Federal Income Tax or cutting spending to dampen economic activity. You have less money to spend if you’re paying more Federal Income Tax. And, if the government cuts spending, there’s less money flowing into the economy. 

The real issue with governments raising independent tax levels or cutting spending is that it interferes with the nature of the free market, and there’s a greater risk of job losses or a recession.

  • Monetary Policy: The Federal Reserve (the USA’s Central Bank) has 2 options to decrease inflation. It can either increase interest rates or sell government bonds. Increased interest rates make loans less appealing. So, people are less likely to take out a loan since they’ll have to pay back a higher return.

If the Federal Reserve sells government bonds, it removes cash flow from the economy. 

Fiscal and monetary policy slows down economic activity during inflationary market conditions, encourages people to save, and over time, lowers inflation.

But what does that mean for your investment portfolio?

How Does Inflation Affect Investments?

Inflation isn’t always bad news for your wealth or investment portfolio, but traditional assets like bonds carry more inflation risk than some alternative investment options.

Here’s a look at how inflation affects different investment types.

1. Savings

How Does Inflation Affect Investments

There's still an inflation risk even if you’ve invested your money in cash alternatives like a savings account. 

For example, while you’re planning your retirement fund, you can keep up with rising inflation by adding money to your savings account each month. But, once you’re retired and start living off your savings, high inflation diminishes your wealth’s purchasing power.

2. Fixed Income Investments


An investment like a bond pays a fixed interest rate that allows your wealth to grow via regular payments.

But if rising inflation outpaces the fixed interest rate, your accumulated wealth will lose its purchasing power.

Furthermore, if the Federal Reserve increases interest rates, existing bonds decrease in price because newer bonds have more attractive interest rates and a higher potential return. This makes existing bonds particularly sensitive to the Federal Reserve changing rates.

For example, if you buy a bond that pays a fixed interest rate of 2% and inflation increases to 4%, the real interest rate on your bond is negative 2%. Thanks to these changing rates, newer bonds with a higher interest rate will now give you a more significant inflation adjusted return.

A safer option is to invest in Treasury Inflation Protected Securities or TIPS. When you buy treasury inflation protected securities, you’re buying bonds with a floating interest rate sold by the US Treasury. The interest rate rises with inflation, so a higher inflation rate means you earn a higher accrued principal.

3. Stock Investments

Recession proof stocks

Stocks are often a go-to investment during times of high inflation.

In theory, a company’s revenues and earnings should increase along with high inflation rates. So, their stock prices should rise as the general price of goods and services increases.

However, the real issue with stocks is that past performance isn’t a guarantee of future results. Tech stocks, foreign stocks, and emerging market stocks tend to fall in price during times of high inflation.

Look for companies with pricing power to perform well during inflation. Companies with pricing power can increase their prices to keep up with inflation. 

Another option is to invest in a mutual fund that invests in stocks. So, you can let an investment professional decide which cash alternatives have the greatest potential to mitigate inflation risk.

4. Real Assets Like Real Estate & Fine Wine


Real assets like commodities, real estate, and wine tend to have a positive relationship with inflation.

For example, as inflation increases, so does your rent.

And you don’t have to buy a house to invest in real estate. You can put money into REITs or a mutual fund that invests in REITs and maintain your purchasing power without paying for an entire property.

However, there’s still an investment risk with real assets like commodities and real estate as they’re subject to market volatility. 

But not all real assets suffer from excess market volatility. For example, the price of a fine wine actually becomes less volatile the longer you hold onto it. This is because fine wines become rarer with age and appreciate in value.

Now, let’s look at some of the benefits and drawbacks of investing for inflation.

Pros & Cons Of Investing For Inflation

How To Diversify Your Portfolio

The main upside of changing your investment strategy to hedge against inflation is that it protects your portfolio from losing value during inflationary times. Another critical aspect is that hedging against inflation provides portfolio diversification - which is beneficial during periods of market volatility.

On the other hand, drastically switching up your investment strategy isn’t recommended by experts and could lead to greater risk and reduce your accumulated wealth.

For example, if you’re investing for continuing education or planning your retirement fund, financial professionals don't recommend changing your long term goal in response to short term market conditions. However, experts aren’t certain if we’re experiencing long term inflation.

Before making any big changes, especially to long term investments like your retirement fund, seek retirement advice from a financial professional and reduce your investment risk.

Here are some investment professionals you can reach out to:

  • Equitable Advisors LLC
  • Broadridge Advisor Solutions
  • Securities America

Now, let’s look at a truly inflation-proof investment - fine wine.

Fine Wine: The Ultimate Inflation-Proof Investment


Fine wine is an excellent inflation hedge that provides diversification and lucrative future results to help your investment portfolio achieve its long term goal.

It acts as an inflation hedge because as inflation increases, so does the price of fine wine. So, if you have a collection of fine wines and inflation increases, the secondary market value of your bottles increases. 

Furthermore, fine wine provides lucrative returns in both the long term and short term. For example, the fine wine market generated 13.6% annualized returns over the last 15 years, and the Liv-ex 100 index increased 22% in 2021 alone.

But how do you get started on your wine investment journey?

You can invest in wine in multiple ways.

If you choose to buy and sell wines yourself, it can be a bit tricky to know which bottles will appreciate in the future. You’ll also have to ensure your bottles have temperature and humidity-controlled storage facilities so they age well.

Furthermore, you’ll have to find the perfect buyer at the right time. 

Why not let a professional handle the hard work for you?

Vinovest is a world-class wine investment platform that makes procuring, authenticating, and storing fine wines super easy. They’ll even store your bottles in their temperature-controlled bonded warehouses and pick the perfect time to sell them.

Or, you can have your wine delivered to you at any time.

Guard Your Portfolio Against Inflation With Fine Wine


A fantastic alternative investment like fine wine generates lucrative returns, provides incredible stability to your portfolio and is an excellent inflation hedge. Protect your purchasing power by adding a bottle of fine wine to your collection.

Sign up with Vinovest today for the easiest way to buy, store, and sell rare and authentic wines from around the world.

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