How to Invest in an Elevated Inflation Environment

The inflation shock of 2021-2023 was a defining event for a generation of investors who had grown up with near-zero inflation and near-zero interest rates. CPI in the UK peaked above 11% in late 2022. US inflation hit highs not seen since the early 1980s. Central banks raised rates at the fastest pace in decades, and long-duration bonds — considered "safe" assets — suffered losses that for many portfolios were the worst in living memory.

Inflation has since moderated across most developed economies. But the post-pandemic experience has changed how many investors think about inflation risk. The consensus view, that central bank credibility had permanently suppressed inflation, no longer commands the confidence it once did. And with global debt levels elevated, demographic pressures, energy transition costs, and geopolitical fragmentation all creating structural inflationary pressure, the question of how to invest for a "higher for longer" inflation environment remains highly relevant.

Assets That Have Historically Performed Well in Inflationary Environments

Inflation-linked bonds: Bonds with coupons and principal linked to a price index — UK Index-Linked Gilts (linkers), US TIPS (Treasury Inflation-Protected Securities), and equivalents in other developed markets. These directly protect against CPI inflation. However, their real yield (the return above inflation) is determined by market pricing, and in 2022-2023, rising real yields caused significant mark-to-market losses even on inflation-linked bonds. They protect against inflation most clearly when held to maturity.

Real assets — property and infrastructure: Physical assets whose value and income streams are linked (directly or indirectly) to prices. Well-located real estate with rent reviews linked to inflation has historically maintained purchasing power. Infrastructure assets — toll roads, ports, utilities, pipelines — often have contractual revenue links to CPI or RPI. Listed infrastructure funds (available to retail and HNW investors) offer more liquid access to this asset class.

Commodities: Raw materials — energy, metals, agricultural products — are often direct drivers of inflation. Exposure to commodities via funds or ETFs has historically provided inflation protection, though commodities are highly volatile and cyclical. They perform best as an inflation hedge during supply-driven inflation (as in 2021-2022) rather than demand-driven inflation.

Short-duration bonds and floating rate debt: In an environment of rising interest rates (which typically accompanies inflation), shorter-duration bonds are less sensitive to rate moves. Floating rate loans (senior secured loans to corporates, sometimes held in "loan funds") pay a coupon that resets with market rates — so as rates rise, the income from these instruments rises with them.

Equities — with nuance: Equities have historically been a reasonable inflation hedge over the very long run, because companies can pass on cost increases to consumers (pricing power). However, the relationship is not reliable in the short to medium term. During the inflation surge of 2022, many growth equities — technology companies with most of their value in distant future cash flows — fell sharply as discount rates rose. Value equities (financials, energy, materials) often performed better. The quality of the individual business matters enormously.

Real Estate Investment Trusts (REITs): Provide equity-like access to property without the illiquidity of direct ownership. Their inflation protection depends on the type of property and lease structures. Industrial REITs with short lease terms and market-rent reviews have generally been better inflation hedges than long-lease property with fixed uplifts.

Assets That Have Historically Performed Poorly in Inflationary Environments

Long-duration government bonds: The worst performers in the 2022 inflation episode. A 30-year gilt with a coupon of 1% lost roughly 50% of its market value as yields rose. The mathematics are unforgiving: the longer the duration, the greater the sensitivity to yield moves. In an inflationary environment where central banks must raise rates, long-duration bonds suffer.

Cash: Real returns on cash are negative when inflation exceeds nominal interest rates. This was the experience for much of the past two decades — low rates meant cash savers lost purchasing power. With interest rates higher in 2026, cash now earns positive nominal returns, but depending on whether rates remain above inflation, real returns may still be marginal.

Growth equities: Companies whose value is based on earnings projected far into the future (many technology and growth companies) are sensitive to the discount rate used to value those future earnings. When rates rise — as they do in an inflation response — these valuations compress, sometimes sharply.

Long-duration corporate bonds: Share the duration risk of government bonds, compounded by credit risk. Investment-grade long-dated corporate bonds suffered significantly in 2022.

The 2022-2024 Experience and Lessons Learned

The 2022 inflation episode generated several important lessons:

Diversification did not protect as expected. In 2022, both equities and bonds fell sharply simultaneously — the traditional 60/40 portfolio delivered its worst year in decades. The "negative correlation" between bonds and equities that portfolios relied on broke down precisely when diversification was most needed.

Inflation arrived faster than central banks acknowledged. The "transitory" narrative of 2021 delayed rate rises. Investors who hedged early (by reducing long-duration bond exposure, adding commodities, reducing growth equity weight) fared better.

Real assets significantly outperformed. Infrastructure and energy assets provided meaningful protection. REITS were more mixed, depending on the type.

The speed of the tightening cycle mattered. Even inflation-linked bonds fell in mark-to-market terms because the rapid rise in real yields overwhelmed the inflation compensation component.

Global Inflation Trajectory as of 2026

As of mid-2026, headline CPI in most developed economies has returned to levels closer to — though in some cases still modestly above — central bank targets of around 2%. However, several structural forces suggest inflation is unlikely to return to the ultra-low levels of the 2010s:

• Energy transition costs (decarbonisation requires significant capital investment, some of which is inflationary)
• Deglobalisation and supply chain reshoring
• Ageing demographics in Europe and the US reducing the working-age population relative to dependants
• Elevated government debt levels limiting the fiscal response to future downturns

Most central banks have signalled readiness to respond quickly to any re-acceleration of inflation. The key uncertainty is whether the rate cuts that began in 2024 will prove premature if underlying inflation proves sticky.

Portfolio Positioning

For internationally mobile HNW investors, the practical implications are:

• Avoid heavy concentration in long-duration bonds as a "safe" position — the 2022 episode demonstrated the risk.
• Maintain a meaningful allocation to real assets — direct property, infrastructure funds, or listed REITs.
• Hold commodities as a specific inflation hedge — typically 5-10% of a portfolio, recognising the volatility.
• Favour short-duration or floating rate credit over long-dated fixed income within a bond allocation.
• In equities, quality and pricing power matter — businesses that can raise prices without losing customers are better positioned in inflationary periods.
• Review cash positions regularly — cash has improved significantly as an asset in the higher rate environment, but it should not be a passive long-term holding.

How Global Investments Can Help

Navigating inflation risk requires a portfolio construction approach that goes beyond standard asset allocation models. Our investment advisers work with internationally mobile clients to build portfolios that are explicitly resilient to inflation scenarios — while remaining appropriately diversified and aligned with your risk tolerance and liquidity requirements. Contact us to review how your current portfolio is positioned for the inflation environment.

This article is for general information only and does not constitute a recommendation to buy or sell any investment. All investments carry risk and can fall as well as rise in value. Past asset class performance is not a guide to future results.