In today's world, it can feel as if inflation has propelled prices up a never-ending staircase. Because of this, many of us are trying to figure out how to keep our money from sliding back down. This is especially true for our investments. The main reason we invest is to grow our money, right?

You might have heard that investing in shares can be a weapon against the uphill battle of rising costs. But is this really the case?

We're here to unpack this and help you understand whether shares do indeed live up to their reputation as inflation-resistant investments.

What is inflation?

Inflation is when the prices of goods you buy – like groceries, food or clothes – keep increasing. When this happens your money doesn't stretch as far as it used to. That's because you need more of it to buy the same stuff.

For a real example, around mid-2021, Australia hit a period of higher inflation. You might have noticed that your weekly grocery bill was higher even though you may have been buying the same things.

In terms of numbers, Australia's inflation rate jumped to over 3% by the end of 2021, which was a big leap from previous years. It means if you had $100, what you could buy with that $100 before might now cost $103 or more.

How does inflation affect different types of investments?

There's a common misconception about inflation and investments. Many new investors get tripped up thinking their money is safe just sitting in the bank or in certain investments. They might not realise that inflation can eat into the value of their investments, too.

So, how does inflation impact different types of investments?

• Cash: cash doesn't grow much just sitting in your account. When inflation comes along, it means your cash buys less over time. It's like having a $10 bill today that can only buy what $9 could yesterday. Safe, but not growing.
• Bonds : bonds allow you to lend your money and get it back with a usually fixed rate of interest. But if inflation is high, the interest you earn might not be enough – you're getting back less buying power than you expected. Yes, you're still earning something, but it might not keep up with how fast prices are rising.
• Property : property tends to perform better with inflation. When prices go up, often the value of property and rent goes up too. It's not a sure thing, but property can hold its value or even increase with inflation. Of course, as with any investment, property prices can decline for a range of reasons that have nothing to do with inflation.
• Shares : with shares, you own a small part of a company. If the company does well, your shares can grow. During inflation, some companies may still have strong profit growth above inflation and their shares can increase in value. But remember, shares can be up one day and down the next, so there's still risk involved.

Inflation affects each investment type differently. It helps to understand how to make an informed decision about which ones to invest in your portfolio.

How have shares performed in times of high inflation?

History has some tales to tell about the performance of shares during different inflation episodes. So, let's take a quick trip back in time and see how shares have performed in the past.

Riding the wave: US stocks in the swinging 70s inflation

In the 1970s, the world saw significantly high inflation. The US had inflation rates soaring up to around 13.5% by 1980. Initially, share prices fell because investors were worried about how companies would handle the rising costs. For example, the Dow Jones Industrial Average, a big stock market index, dropped significantly in the mid-70s.

But then something interesting happened. Many companies managed to adapt. They increased their prices, and their profits kept growing. As a result, share prices started to climb back up.

Australian shares in 2022: Inflation’s ups and downs

In 2022, Australia went through a significant inflation phase, with inflation rising to almost 8% . This had a varied impact on the stock market. Shares in some sectors, like technology and healthcare, managed to maintain or increase their value despite the pressure of inflation.

On the other hand, sectors more sensitive to economic changes, like retail and travel, saw greater fluctuations. As costs rose, consumers spent less in these sectors and some of these stocks dipped in value.

This period reflects the diverse responses of different sectors to inflation. It’s an example of how the stock market isn’t a single entity but a collection of different stories.

What are some factors influencing share performance during inflation?

Let's look into what makes shares tick during times of inflation. There are a few key things that can affect how shares perform.

1. Company performance . If a company is making a strong profit and keeping its costs under control, even when prices are going up everywhere, its shares might still perform well.
2. Specific sector a company is in. Different types of businesses respond differently to inflation. For example, technology companies may not be hit as hard by rising costs compared to businesses like luxury retail.
3. Geographic exposure . A company that operates in many countries might not feel the pinch of high inflation in a single country as much. It's the concept of diversification – it spreads their risk.
4. Ability to pass on costs. Some companies can pass the higher costs from inflation onto their customers by raising prices. If they can do this without losing too many sales, their share prices might remain stable.
5. Interest rates. When inflation is high, interest rates often go up to limit consumer spending from contributing to demand and pushing prices up even further. This can make borrowing more expensive for companies, which could hurt their profits as it's harder to invest in growth and innovation.

So, when you're looking at shares during inflation, you want to consider these things. Remember, it's not just one thing that affects share performance; it's a mix of several factors.

"Shares are an inflation-resistant investment" – is there any merit to this?

Some studies show that, over long periods, shares have generally beaten inflation. Jeremy Siegel, a professor at the Wharton School, conducted a research study showing that, on average, stocks have grown about 6.5-7% each year after accounting for inflation. This dates back to 1800.

To put this in more recent terms, the S&P 500 Index, from 1996 until around mid-2022, also showed a similar trend.

Then, there are insights from financial experts like Warren Buffett. Buffett has often said that shares are a good protection against inflation. He reasons that good companies can raise their prices during inflation, which can lead to higher profits. In turn, this can lead to higher share prices.

But, it’s not always that simple. Other experts warn that shares aren’t always reliable in the short term. This view is shared in financial analyses by investment firms like Vanguard and Fidelity . They suggest that, yes, shares can be good against inflation. But this is not guaranteed, and there are still risks.

It depends on the company and the industry. For example, companies that need to buy a lot of materials to manufacture their products might struggle with higher costs, and their share prices might suffer.

The big takeaway? Shares can potentially help protect your money from inflation, but it's not guaranteed. Like any investment, shares come with risks, and their performance can vary. It’s important to do your research and talk to a financial adviser if you’re unsure.

What are some pros and cons of investing in shares for inflation resistance?

Thinking about shares as a way to protect your investment portfolio against inflation has historically been a popular move. But like anything in the world of investing, shares have their ups and downs. Let's explore the pros and cons of investing in shares during times of inflation:

Pros of investing in shares	Cons of investing in shares
Potential growth – over time, shares can potentiall grow more than inflation, increasing your money's value.	Market volatility – shares can be like a rollercoaster with lots of ups and downs, especially in the short term.
Company profits – if companies do well, their share prices can go up. This can potentially give you a nice return.	No guarantees – unlike a fixed deposit, the return on shares isn't guaranteed. This means that you might even lose money.
Dividends – some shares pay dividends even during times of inflation, giving you extra cash regularly.	Complex to understand – for people who are new to investing, shares might feel daunting.
Easy to buy and sell – shares are fairly liquid, meaning you can quickly turn them into cash if needed.	Influenced by many factors – economic changes, company issues, and global events can all affect share prices.
Diverse options – you can choose from many types of shares across different sectors and countries.	Emotional stress – the variability in share prices can be stressful to watch.

When it comes to handling the ups and downs that come with inflation, diversification and long-term investing can be your allies. Diversification means not putting all your eggs in one basket. This investment strategy is about spreading your investment across different types of shares and other assets.

On the other hand, long-term investing is about playing the long game. This gives your shares time to grow and ride out the rough patches. Such an approach can help manage the volatility that comes with inflation and keep your investment journey on a steadier path.

The good news is that, historically speaking, high periods of inflation haven't lasted forever. And it helps to remember this when making investment decisions.

Conclusion: navigating the inflation maze with shares

So, do shares hold up as an inflation-resistant investment? Well, the answer isn't a simple yes or no.

Shares have had their moments in the spotlight during high inflation times in history. But remember that past performance isn't a crystal ball for the future. Shares can potentially be a good tool to protect against inflation, especially in the long run. But they come with their own set of risks and rewards.

As you step forward on your investing path, keep these insights in your back pocket. Yes, shares can sometimes be a helpful ally in your fight against inflation. But like any good ally, they need to be understood and managed wisely.

Happy investing!