How does inflation affect your investments?

Inflation has a way of making everything feel less certain, including your investments. When prices rise faster than expected, it's natural to wonder whether your portfolio can keep up. The good news is that inflation, while disruptive, doesn't have to derail your financial goals. Understanding how it affects different types of investments—and knowing which moves to make—puts you in a stronger position to protect and grow your wealth, no matter what the economy is doing.

Inflation is the general rise in the prices of goods and services over time—and as prices rise, each dollar buys less than it did before. This decrease in purchasing power is at the heart of why inflation matters for your investments, not just your grocery bill.

Inflation happens when an economy has too much money chasing too few goods. When consumer demand for goods and services is abnormally high, inflation typically rises faster than its long-run historical average, which the Bureau of Labor Statistics puts at just over 3%.

Inflation also can stem from an unusually low supply of goods and services when demand stays constant, as happened during supply-chain disruptions in recent years. The Federal Reserve targets an inflation rate of around 2% as a healthy baseline. When inflation rises significantly above that level, it starts to affect investment returns in meaningful ways.

Inflation affects different asset classes in different ways: some feel the pressure quickly, while others actually can benefit from rising prices. Here’s what to know about the most common investment types.

Stocks (also known as equities) have historically been one of the stronger long-term defenses against inflation, with annualized returns averaging about 10%—well above the historical inflation average of around 3%.¹ Over the long run, equities tend to grow faster than prices do.

In the short term, though, high inflation creates volatility. Stock prices largely are based on investor expectations of future earnings, and extreme inflation makes those projections harder to gauge. Companies with high debt loads tend to struggle as borrowing costs rise; businesses with strong cash flow tend to fare better. Growth stocks typically underperform value stocks during inflationary periods, though they may recover faster once inflation cools.

Bonds generally lose value during high inflation because bond prices move in the opposite direction of interest rates—and rates typically rise when inflation does. The longer the bond’s duration, the more sensitive it is to this effect. Long-term bonds and long-term bond mutual funds tend to experience the steepest price declines during inflationary periods.

TIPS specifically are designed to keep pace with inflation. Their principal is linked to the Consumer Price Index (CPI), so both the principal and interest payments adjust upward when inflation rises. TIPS can be held as individual bonds or through mutual funds. Note that falling inflation reduces the value of TIPS—they may be most effective as a targeted hedge, not a core holding.

Series I bonds offer inflation protection through a blended interest rate—part fixed, part variable—tied to the CPI and compounded semi-annually. They’re available directly from the Treasury, with a purchase limit of $10,000 per person per calendar year. I bonds are a low-risk option for investors seeking a straightforward inflation hedge within their fixed-income allocation.

Real estate tends to hold its value—and often appreciates—during inflationary periods because property values and rental income typically rise along with prices. Homeowners with fixed-rate mortgages benefit from owning an appreciating asset at a locked-in cost of debt. For investors without physical property, real estate investment trusts (REITs) offer exposure to income-producing properties through the stock market.

Commodities—raw materials like oil, natural gas, precious metals and agricultural products—tend to rise in price during inflationary periods, making them a natural hedge. Gold in particular has a long history as a store of value during economic uncertainty, though its short-term performance can be volatile. Most investors access commodities through commodity-focused mutual funds or ETFs rather than holding physical assets.

Consumer staples companies sell everyday necessities—food, household products, personal care items—that people continue buying regardless of economic conditions. Because demand for these products is relatively stable, consumer staples stocks tend to hold up better than discretionary stocks during inflationary periods. Positive returns are never guaranteed, but this sector is generally considered more defensive during inflation.

Cash and low-interest savings accounts lose real value during inflation. If your savings account earns less than the rate of inflation, your purchasing power shrinks over time. Long-term certificates of deposit (CDs) carry similar risk—locking in a low rate today can work against you if rates rise further. This doesn’t mean avoiding savings accounts entirely, but it does mean being strategic about how much you hold in low-yield instruments relative to your overall portfolio.

You should generally keep investing during inflationary periods because saving alone is unlikely to preserve your purchasing power. Inflation is actively eroding the value of idle cash, so the goal of investing during inflation is to produce returns that outpace the average rate of inflation over time.

Consider a hypothetical: if inflation runs at 4% annually for 20 years, and your stock portfolio grows at 8% annually during that same period (below its historical average), you’re still doubling the rate of inflation—growing your wealth rather than losing ground. Simply leaving money in a low-interest savings account over the same period means your dollars buy less every year.

Five strategies can help your portfolio hold up during inflationary periods: diversifying into inflation-resilient assets, using dollar-cost averaging, maximizing your employer’s 401(k) match, building a bond or CD ladder, and rebalancing your portfolio regularly. Here’s how each works:

Shift your portfolio toward assets that tend to perform better during inflation—such as TIPS, I bonds, REITs, commodities and value stocks—while reducing exposure to those most vulnerable, including growth stocks and long-term bonds. Diversified mutual funds that hold a broad mix of securities can help spread risk across asset types and economic conditions.

Dollar-cost averaging means investing a fixed dollar amount at regular intervals—monthly retirement contributions, for example. Because you automatically buy more shares when prices are low and fewer when prices are high, this strategy smooths out the impact of volatility over time. Investors should consider their long-term ability to maintain contributions through varying economic conditions.

If your employer offers 401(k) matching contributions, contribute at least enough to capture the full match. For example, a 50% match on up to 6% of your salary is effectively a 50% return on that portion of your investment—far exceeding the impact of any inflation rate.

Bond and CD yields typically rise during inflation. By staggering the maturity dates of your fixed-income holdings—a strategy called laddering—you reduce interest rate risk and stay positioned to reinvest at higher rates as they become available, rather than being locked into lower rates long-term.

Inflation can shift your portfolio’s allocation in ways that may not be immediately obvious. Regularly reviewing and rebalancing—buying and selling to restore your target mix—helps ensure your investments continue to reflect your risk tolerance and goals. A financial advisor can assist with this and help assess whether your allocation is well-suited for current conditions.

Yes, certain insurance and annuity products can offer a measure of inflation protection alongside traditional investment assets.

Some annuities—including indexed and variable annuities—can help offset inflation while providing a guaranteed income stream in retirement. Certain contracts include inflation-adjusted payment features, which can help preserve purchasing power over time.

Permanent life insurance contracts—such as whole life or universal life—include a cash value component that can grow over time. Some contracts offer flexible premium structures and inflation protection on ongoing benefits, which can be an advantage when everyday costs are rising.

Use this as a quick-reference guide when reviewing your portfolio during periods of high inflation:

Inflation is a normal part of any economy, but periods of elevated inflation are a good opportunity to reassess your portfolio and make sure it’s positioned well. The right mix of inflation-resilient assets—combined with strategies like diversification, dollar-cost averaging and periodic rebalancing—can help you stay on track toward your long-term goals.

A local Thrivent financial advisor can help you review how inflation may be affecting your specific situation, identify which hedges make sense for your goals, and keep your financial plan moving forward with confidence.