What Inflation Does to Long-Term Investing
The silent tax on idle money, and why cash is rarely 'safe' over decades.
Inflation is the gradual loss of money's purchasing power. £100 in 1990 bought what £230 buys today. Over a 30-year retirement, even modest 2.5% annual inflation cuts your money's real value in half.
The cost of “safe” cash
£10,000 left in a 1% savings account for 25 years grows to £12,800. With 2.5% inflation, the real purchasing power has dropped to about £6,900 in today's money. The number on your statement went up, but you can buy 30% less with it.
This is why long-term cash holdings — for anything past your emergency fund — work against you. A “safe” zero-volatility holding is guaranteed to lose real value.
Real vs nominal returns
The number to track isn't your headline return — it's your real return (after inflation):
• Cash savings: 4.5% nominal − 2.5% inflation = 2.0% real
• UK gilts: 4.5% nominal − 2.5% inflation = 2.0% real
• Global stocks (long run): 8% nominal − 2.5% inflation = 5.5% real
Stocks have historically delivered 4–7% real returns over multi-decade periods. Bonds and cash are closer to 0–2% real. The gap compounds dramatically.
How stocks fight inflation
Stocks are claims on real businesses. Inflation lifts the prices those businesses charge — and their costs — so revenue and profits scale roughly with prices. Over long horizons, equity prices broadly track inflation plus real productivity gains.
Short-term it's messier. The 1970s inflationary spike was bad for stocks. 2022 — when inflation jumped from 2% to 10% — saw global stocks down 15%. But across decades, equities have outpaced inflation more reliably than any other liquid asset class.
Inflation-protected options
For investors specifically worried about inflation:
• Index-linked gilts (linkers) — UK government bonds where the principal rises with RPI/CPI
• Global stocks — the standard hedge over 10+ year horizons
• Property (REITs) — rent rises tend to track inflation
• Commodities — volatile but inflation-correlated
For most people, the answer isn't a special “inflation hedge” — it's simply not holding too much cash.
See the inflation-adjusted returns calculator to see what your portfolio is really earning, and the emergency fund calc to size your cash buffer.
