Beating inflation: how investing could help

In a previous article, we explored the difference between saving vs investing. Saving plays an important role in protecting your money, especially for short-term needs. Investing, on the other hand, aims to help your money grow.

But investing can also serve a protective purpose, particularly when it comes to inflation.

What is inflation?

Inflation measures how much the price of goods and services goes up over time. As prices rise, you’re not able to buy as much with the money you have. This is sometimes known as a reduction in your ‘purchasing power’. 

Let's look at some examples.

As you can see, even in just a year, your money doesn’t go as far. To make sure your wealth isn’t slowly eroded over time, you ideally want it to grow faster than prices increase.

Understanding nominal vs real returns

When you’re weighing up where to put your money, it helps to understand the difference between real returns vs nominal returns.

Nominal returns are the headline figures. For example, if your savings account pays 2% interest a year, that’s your nominal return. It doesn’t take inflation, taxes or fees into account.

Real returns go a step further. They factor in inflation (as well as costs and tax where relevant) to show whether your money is actually growing in terms of what it can buy.

That matters. Because if your savings account pays 2% interest but inflation is running at 3%, your money may be growing in nominal terms. In real terms though, its purchasing power is shrinking.

The goal isn’t simply to grow your money. It’s to grow it faster than prices rise.

How investing could help

This is where investing can come in. There are a few reasons why it may be a more effective way to outstrip inflation.

Firstly, long-term equity returns have historically outpaced inflation.¹ Although it’s important to note that past performance isn’t an indicator of future returns.

Secondly, compounding returns can play a powerful role. This is where any returns you make can be reinvested. Over time, this effect can potentially accelerate growth.

Finally, diversifying your portfolio with a mix of different types of investments can also help. It doesn’t totally remove risk. But it can make your portfolio more resilient to different economic conditions, including times when inflation is high.

However, you should bear in mind that investing isn’t necessarily a silver bullet. This is particularly true in the short term. Market volatility might mean you make a loss or that inflation still outstrips your money’s growth. 

Often, these market dips are temporary, but if you need your money soon, that loss could be locked in. This is why cash is best for short-term goals, and investing is more suitable for long-term goals (5 years or more). When it comes to inflation, time in the market really matters.

The bottom line

It can feel safer to leave your money alone, rather than invest it. But actually, if you look at the real returns on your money, it might be gradually leaving you out of pocket. 

Long-term investing doesn’t eliminate inflation risk, but it can be one of the most effective tools for helping your money retain its purchasing power over time. 

1. https://www.jbs.cam.ac.uk/2022/equities-and-inflation/ accessed 24 February 2026.

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