Inflation is the general rise in prices over time. It means each dollar buys a little less every year. For investors, the question is not just “did my money grow?” but “did it grow faster than prices?”
Real return: the number that matters
Real return ≈ nominal return − inflation.
A savings account paying 2% while inflation runs at 3% has a real return of about −1%. Your balance goes up; your buying power goes down. Over 20 years at 3% inflation, prices rise by about 80%, so $100,000 in cash would buy what roughly $55,000 buys today. The US inflation rate is published monthly by the Bureau of Labor Statistics as the Consumer Price Index.
How different assets react
Cash and savings. Safe in dollars, vulnerable in buying power, especially when rates lag inflation.
Bonds. Fixed interest payments lose value as prices rise, and inflation usually pushes interest rates up, which lowers existing bond prices. In 2022, high inflation and rapid rate hikes produced one of the worst years on record for US bonds.
Stocks. Over long periods, companies can raise prices and grow earnings, so stocks have historically outpaced inflation. In the short run, a surprise jump in inflation often hurts stocks, particularly companies whose value rests on profits far in the future.
Real estate. Rents and property values tend to rise with inflation over time, but higher mortgage rates can cool prices.
Commodities and gold. Sometimes rise with inflation, but their record is uneven and they produce no income.
Tools to protect your money
- Treasury Inflation-Protected Securities (TIPS): the principal adjusts with CPI, so both value and interest keep pace with inflation.
- Series I savings bonds: sold at TreasuryDirect, rate partly tied to inflation, up to $10,000 per person per year electronically, must be held at least a year (a three-month interest penalty applies before five years).
- A healthy share of stocks for long-term goals.
- Short-term bonds and T-bills, which reset to new rates quickly when rates rise.
What not to do
- Keep large sums in a checking account for years.
- Panic-buy gold or crypto after inflation headlines.
- Forget to include inflation in retirement goals. A plan that needs $50,000 a year today will need far more in 25 years.
Planning for it
Use real returns when estimating long-term growth, keep a diversified asset allocation, and review it as goals approach. Inflation also works through interest rates, which is why the two topics go together. For the savings side, see saving vs investing.
