Inflation - how investors can manage rising prices

Inflation happens when the price of goods and services go up over time. When inflation rises, the same amount of money buys you less than it did before - in other words, your money’s purchasing power falls.

It’s been in the news over the last few years as inflation has been affected by events such as the Covid-19 pandemic, Russia’s attack on Ukraine, and more recently, events in the Middle East. In the UK, for example, inflation reached 11% in October 2022. After some ups and downs, it sits at 3.3% as of March 2026 but that’s still higher than the 2% target set by the Bank of England.

Even when inflation isn’t making the headlines, understanding how it works in relation to your investments and savings can help you make smarter decisions.

Why understanding inflation matters

• Inflation not only affects your daily life, such as the cost of living and how far your money goes, it also affects the value of your investments. 
• It can help you understand ‘real returns’ - how much your investments grow after taking inflation into account - which shows the true progress of your investment portfolio.
• It helps you keep your long-term investment goals, like funding retirement or a house purchase, on track despite price increases.

RPI and CPI: what they mean and how they differ

In the UK, inflation is often measured using two main indices: the Retail Prices Index (RPI) and the Consumer Prices Index (CPI). Both track how the cost of a ‘basket’ of goods and services changes over time, but they use different methods and include different items, which can lead to different inflation rates.

• What they are: CPI is the UK’s main headline measure of inflation and is used for the Bank of England’s 2% inflation target. RPI is an older measure that is still used in some contracts and reporting.
• Housing costs: RPI includes some housing-related costs such as mortgage interest payments and council tax, while CPI does not include mortgage interest payments (it focuses on consumer spending). 
• How they’re calculated: CPI uses a method that better reflects how shoppers substitute between products when relative prices change. RPI uses an older approach that can produce a higher rate than CPI in the same period.
• Why it matters: The index used can affect how ‘real returns’ are calculated and how some payments change over time. For example, certain wages, pensions, rents, bonds, or regulated prices may be linked to CPI or to RPI depending on the contract.

For investment decisions, the inflation measure matters because it changes what 'keeping up with inflation' means in practice. If you compare your portfolio growth to CPI but your key costs (or future commitments) rise more like RPI (or vice versa), you may overestimate or underestimate your true progress. It also affects decisions about inflation-linked investments (such as index-linked gilts) where payments are explicitly tied to a particular index, and it can influence retirement planning where income increases in a pension or annuity may be linked to CPI or RPI depending on the product.

How different types of investment respond to inflation

Whether you’re thinking about your current investments or planning to invest, it’s worth considering how different types of investments may work in different economic climates - for example, when there’s high inflation. Some investments are directly linked to an inflation index (so their payments can rise with inflation). Others are affected more indirectly, because inflation often leads to changes in interest rates and in what people can afford to buy. When you compare returns, it helps to use the same index your investment (or your main costs) is linked to.

Here’s a selection of different investments that may be able to beat inflation, and an explanation of how that works.

• Company shares: Shares aren’t directly linked to an inflation index, but they can be affected by inflation. Shares can help protect against inflation because companies can grow their earnings as prices rise. When inflation pushes up the cost of goods and services, many businesses are able to pass some of those higher costs on to customers by increasing prices, such as supermarkets. Over time, this can lead to higher revenues and profits, which can support share prices and help investors keep pace with inflation.
  
  But there are businesses that aren’t able to pass rising costs on to customers, such as those where customers have taken out fixed contracts, and others where price rises put customers off buying, particularly in areas of discretionary spend - where the goods or services are not essential. For example, restaurants may struggle as people put off going out, whereas supermarkets tend to do well regardless of inflation because people still need to buy food.
  
  Companies have the potential to adapt, grow and invest as the economy changes. Over the long term, this growth potential has helped shares deliver returns that have tended to outpace inflation, although they can be more volatile in the short term and may not protect against inflation in every period.
• Property and Infrastructure: Property and infrastructure are often seen as helpful during periods of inflation because the income they generate and their values can rise as prices rise across the economy. Contracts may be inflation-linked to either the CPI or RPI index, for example, with property,  rents tend to increase over time as living costs go up. Higher construction and building costs can also support property values, as replacing existing buildings becomes more expensive.
  
  Infrastructure investments - such as utilities, transport networks and energy systems - can also help with inflation because many have income linked to inflation or regulated price increases. These assets provide essential services that people continue to use regardless of economic conditions, which can result in relatively stable demand and income. Together, these features mean property and infrastructure may be better placed than some other investments to hold their value in real terms when inflation is higher.
• Inflation-Linked Bonds: An inflation linked bond is a type of bond designed to help protect your money from rising prices, to rise in line with an inflation index (often RPI). With a normal bond, you lend money to a government or company and receive regular interest payments, plus your original money back at the end. The amount you get back is fixed - which means inflation can reduce its spending power over time. An inflation-linked bond works differently. Both the interest payments and the amount you get back are adjusted in line with inflation. So if prices rise, the payments rise too, helping your money keep its value in real terms. 

Choosing investments that are better placed to handle inflation can be a good way to protect your investments and keep your financial goals on track. Having a diversified range of investments that respond to inflation in different ways means you are likely to be in a stronger position no matter how prices change.