Inflation is often described as the silent thief of wealth, gradually eroding the purchasing power of money over time. Whether you're saving for a home deposit, investing for retirement, or simply growing your wealth, understanding how inflation affects savings and investments is crucial to making smart financial decisions.
Many people assume that money sitting in a savings account is safe, but inflation means that $10,000 today won’t buy as much in ten years if the cost of living rises. Likewise, investments that don’t outpace inflation could see real losses despite showing nominal gains.
So how does inflation impact different types of savings and investments, and what can you do to protect your wealth? Let’s break it down in detail.
What Is Inflation?
Inflation refers to the rise in the cost of goods and services over time, which leads to a decline in the purchasing power of money. It’s typically measured by the Consumer Price Index (CPI), which tracks the average price increase across essential goods like food, housing, transport, and healthcare.
How Inflation Is Measured
- Consumer Price Index (CPI) – The primary measure used to track inflation.
- Trimmed Mean Inflation – Excludes volatile price movements for a more stable reading.
- Wage Growth vs Inflation – Compares how salaries keep up with rising prices.
Example: If inflation is 3% per year, something that costs $1,000 today will cost $1,344 in 10 years if prices rise at the same rate. If your savings don’t grow at the same pace, you’re effectively losing money.
The Impact of Inflation on Savings
Savings Accounts and Term Deposits
Traditional savings accounts and term deposits offer security and stability, but they rarely provide returns that keep up with inflation.
- Pros: Safe, accessible, and low risk.
- Cons: Returns are often lower than inflation, leading to a loss of real purchasing power.
Example: If a savings account offers 2.5% interest and inflation is 3.5%, your money is losing 1% in real value each year.
What to Do: Look for high-interest savings accounts with competitive rates and bonus interest for regular deposits.
Cash Holdings & Emergency Funds
Keeping cash for emergencies is essential, but holding too much cash in a low-interest savings account exposes you to inflation risk.
Example: A $50,000 emergency fund in a 2% interest account loses real value if inflation is 4%.
What to Do: Keep only what you need for emergencies (3-6 months of expenses) in cash, and invest the rest.
The Impact of Inflation on Investments
Shares (Stocks & ETFs)
Investing in shares (stocks) and Exchange-Traded Funds (ETFs) can be one of the best ways to outpace inflation. Companies adjust to inflation by raising prices and increasing revenues, which can lead to higher share prices and dividends.
- Pros: Growth potential, inflation protection, compounding returns.
- Cons: Market volatility requires a long-term mindset.
Example: Over the past 30 years, the ASX 200 has delivered an average return of 9-10%, significantly outpacing inflation.
Property & Real Estate
Real estate is often seen as a hedge against inflation, as property values and rental income tend to rise along with the cost of living.
- Pros: Tangible asset, rental income, capital growth.
- Cons: Requires large upfront investment, and interest rate risk.
Example: A house bought for $500,000 ten years ago could now be worth $900,000+, thanks to inflation and demand growth.
What to Do: Focus on high-growth areas and ensure rental income keeps pace with rising costs.
Bonds & Fixed-Income Investments
Bonds are generally considered low-risk, but they can suffer during inflationary periods. If interest rates rise to combat inflation, bond prices often fall, reducing their value.
- Pros: Stability, predictable income.
- Cons: Returns can be lower than inflation, reducing purchasing power.
What to Do: Consider inflation-linked bonds or diversifying with other assets.
Gold & Commodities
Gold has long been used as an inflation hedge, as its value tends to rise when the cost of living increases. Commodities like oil, wheat, and metals also benefit from inflation-driven demand.
- Pros: Hedge against currency depreciation, inflation-resistant.
- Cons: No passive income, and price fluctuations.
What to Do: Use gold and commodities as a small part of a diversified portfolio.
Superannuation & Inflation
Superannuation is one of the best long-term strategies to beat inflation because of compounding growth and tax advantages. However, the real value of retirement savings depends on investment choices and fees.
- Pros: Tax benefits, employer contributions, long-term growth.
- Cons: Access restrictions until retirement, market risk.
What to Do: Choose high-growth investment options in your super fund to maximise returns over time.
Strategies to Protect Savings & Investments from Inflation
- Invest in assets that outpace inflation – Shares, real estate, and diversified portfolios tend to perform well over time.
- Reduce reliance on cash savings – Keep only what’s needed for emergencies, and invest the rest.
- Reinvest dividends and earnings – Compounding returns help offset inflation.
- Regularly review investment choices – Adjust asset allocation to maintain growth.
- Consider property and rental income – Ensure rents increase with inflation.
- Contribute more to superannuation – Take advantage of tax benefits and long-term compounding growth.
Inflation is unavoidable, but with the right financial strategy, you can turn it into an advantage rather than a threat. Instead of letting your savings lose value over time, focus on growth-oriented investments that consistently outpace inflation.
‘By staying informed and making smart financial choices, you can protect your purchasing power, build wealth, and secure your financial future despite inflationary pressures.
