How Does Inflation Impact Investments?

September 22, 2023
Estimated Reading Time: 4 Minutes
Inflation refers to the rate at which the general level of prices for goods and services rises, causing purchasing power to fall. Essentially, when inflation is high, each unit of currency buys fewer goods and services. This has a broad impact on investments in several ways:

Real vs. Nominal Returns

The real return on an investment is the return after adjusting for inflation. For instance, if you earn a 7% return on an investment in a year with 3% inflation, the real return is only about 4%. So, while the nominal (or stated) return might seem high, the actual purchasing power derived from the investment might be substantially lower.

Fixed-Income Securities

Bonds and other fixed-income securities pay a fixed rate of return, which can be severely impacted by inflation. If inflation is high, the real value or purchasing power of the interest payments can be eroded. Furthermore, when inflation is expected to rise, interest rates often rise in tandem, leading to falling bond prices.


Historically, stocks have been viewed as a hedge against inflation because companies can raise prices for goods and services, potentially leading to increased profits. However, the relationship isn't so straightforward. High inflation can increase input costs for businesses, and if they can't pass those onto consumers, it can hurt profits. The real returns of equities can also be affected by inflation, but they may fare better than fixed-income securities.

Foreign Investments

Inflation can impact exchange rates. If a country has high inflation relative to others, its currency might depreciate. This can affect the returns of foreign investments for investors who trade their investments back into their home currency.

Interest Rates

Central banks often raise interest rates to combat high inflation. Higher interest rates can make borrowing more expensive and can lead to decreased spending and investment in the economy. This can impact the profitability of businesses and, consequently, asset prices. As of the time of this publication, interest rates are at a 22-year high.


The expectation of future inflation can influence investor behavior. If investors expect high inflation, they might demand higher returns to compensate for the loss of purchasing power, which can impact asset valuations and interest rates.

Cost of Capital

Inflation can influence the cost of capital for businesses. When inflation and interest rates are high, the cost to borrow increases. This can reduce corporate investment and impact the growth potential of businesses.

Reinvestment Risk

For investors who receive periodic payouts, such as coupon payments from bonds, there's a risk that they might have to reinvest these proceeds at lower rates if inflation is high and interest rates fall in the future.

Retirement & Long-Term Planning

Over long periods, even low rates of inflation can substantially erode purchasing power. For retirees or those planning for retirement, inflation is a key consideration. The value of future cash flows, like pension or annuity payments, might be much less in real terms due to inflation.

Inflation is considered a deep risk, as it poses a permanent loss of real capital. See the below exhibit for an illustration of how the purchasing power of $1.00 shrank to $0.05 from 1945 to 2022.

Exhibit 1: Inflation-Adjusted Value of a U.S. Dollar, 1945-2022, Source: U.S. Bureau of Labor Statistics
For investors, understanding inflation is crucial as it plays a significant role in determining the real return on investments. Diversification across various asset classes and geographies can be one strategy to manage inflation risks. Reach out to Chicago Partners to set up an introductory meeting with one of our financial advisors who can help you get started on your diversification strategy.

Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.