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How can I protect my investments from inflation?

Inflation is an economic factor that investors must take into consideration when managing their investment portfolio. Inflation is a drag on an (bond) investor’s purchasing power. Today, after inflation, various traditional fixed income classes currently have a negative yield. Investors thus have to diversify to have positive real income.

Invest in equities

Several studies have demonstrated that in the first stage of an inflationary cycle, equities tend to perform well.  Signs of a pick-up in inflation are often the consequence of an improving economic backdrop.

Equities should provide some hedge against inflation, since a company’s profit should grow at the same rate as inflation after a period of adjustment.  A previous  Candriam study confirmed that economic recovery, and thus sound price inflation (so no deflation of hyperinflation) is generally beneficial to equity’s valuations. The price-earnings of the equity market tends to be positively impacted when inflation is between 1% and 4%.