So which assets protect you against inflation, and which ones will see their value eroded the fastest?
Inflation is bad for business. Rising prices drive up company costs and make consumers feel poorer. The cost of servicing debt also rises, as central bankers increase interest rates in a bid to rein in price growth, even at the expense of triggering a recession.
Yet shares can also offer some inflationary protection to investors if they are patient, says Laith Khalaf, head of investment analysis at AJ Bell.
“Investors are essentially buying into the profits of companies and while their costs will rise with inflation, some will see their revenues rise, too.”
Companies with pricing power have an edge, as they can push some of their costs on to customers and even take the opportunity to increase margins.
US inflation hit 12 per cent in 1974 and the S&P 500 fell almost 40 per cent, says Nick Paisner, investment content manager at Cazenove Capital.
“The UK fared even worse, with the FTSE All-Share losing more than 70 per cent.”
Sky-high 1970s inflation eroded investor returns in a short period.
“Profits actually grew in nominal terms by 9 per cent a year during the 1970s, but fearing that the economic malaise would never end, the multiple that investors were willing to pay for those earnings roughly halved,” he adds.
Yet one stock market has stood firm in 2022: the FTSE 100 has fallen only 3.75 per cent this year to date, helped by its exposure to energy stocks such as oil companies BP and Shell, and commodity companies including Anglo American and Rio Tinto.
The index also pays generous dividends, currently yielding 3.7 per cent a year, Mr Khalaf says.
“This goes a small way to making up for inflation, before you add in any capital growth.”
Investors can track the FTSE 100 through an exchange-traded fund (ETF) such as the iShares Core FTSE 100 ETF.
Investing in the spread of global stocks offers some protection through diversification and now may be a good time to buy while share prices are down, Mr Khalaf says. He tips the iShares MSCI World ETF.
It is a long time since people said “cash is king” and it is unlikely to regain its crown, with archenemy inflation at the gates.
Interest rate increases are feeding through to savings rates but returns of 2 per cent or 3 per cent offer little solace as inflation heads towards double digits. Savers are seeing the real value of their money fall faster than ever.
Everybody needs a pot of cash on instant access for emergencies, Mr Khalaf says.
“But for savings, you won’t need for five to 10 years or more, you’re still probably better off putting it into the stock market,” he adds.
“At today’s inflation rates, cash is much less appealing.”
If you are wedded to cash, shop around to get the best deal you can.
Government and corporate bonds typically get hammered by inflation. They pay a fixed rate of income that looks a lot less attractive when prices and interest rates are rising, but bond prices have slumped alarmingly this year.
At the same time, government bond yields have risen sharply. Ten-year US Treasuries now yield 3.23 per cent, up from only 1.34 per cent a year ago.
These rates are still deeply negative in real terms once inflation is factored in, says Jason Hollands, managing director at wealth managers Evelyn Partners.
“As bond markets adjust to this, prices have tumbled.”
Yet there is one type of bond that does offer inflation protection. In the US, they are known as Treasury Inflation Protected Securities (TIPS) and index-linked bonds in the UK, Mr Hollands says.
“They are effectively a form of insurance against rising inflation but, like actual insurance, you need to put it in place before you need it rather than when problems arise.”
It is too late to buy them as protection against this year’s problems but they are something to consider when inflation eventually subsides.
“You can get exposure via ETFs, for example, the Lyxor Core US TIPS UCITS ETF,” Mr Hollands says.
By contrast, commodities are a traditional inflation hedge. As prices rise, physical assets such as copper, iron ore, oil and gas rise, too.
Often, they drive the inflationary surge, as we have seen with oil and gas prices this year, Mr Hollands says.
But he urges caution to those tempted to invest in the commodity sector now.
“There are signs that inflation may be peaking, and the next big threat is a recession, when commodity prices will naturally slow as demand falls,” he says.
The housing market tends to rise and fall with the ups and downs of the economy, says Victoria Scholar, head of investment at Interactive Investor.
“During a recession, house prices typically cool whereas during a boom, they can rocket,” Ms Scholar says.
“Higher interest rates push up mortgage costs, adding to the burden on potential buyers who are already struggling as the cost of everyday living soars, suppressing demand.”
Today’s troubles follow a long housing market boom fuelled by cheap money, with US property prices more than doubling in a decade, up 117 per cent to March 2022.
Prices look unaffordable, with the average UK property costing 9.1 times the average salary, against 3.55 times 25 years ago in 1997.
However, property has not crashed yet — and it didn’t in the 1970s, either. From 1970 to 1982, the median American house appreciated by 159 per cent, according to research by Robert Shiller, at a similar rate to consumer price inflation.
Property has a key role to play in a diversified portfolio during a period of inflation, Ms Scholar says.
“People always need somewhere to live, while yields and valuations still look attractive relative to other asset classes. It also offers diversification.”
Homeowners already have exposure to the property market and this may not be the ideal time to double down by buying an investment property.
A simpler option is to invest in commercial property, possibly through an ETF such as the Vanguard Real Estate ETF, the Real Estate Select Sector SPDR Fund or iShares Mortgage Real Estate ETF.
Gold is said to be a store of value and inflation hedge, but the price has fallen 4.35 per cent over the past 12 months to $1,717.
Two factors are working against the precious metal. The first is rising interest rates, as gold pays no income, while rival low-risk assets such as cash and bonds now offer more.
The second is that gold is priced in US dollars and the rising value of the greenback is making it more expensive for buyers in other currencies, hitting demand.
Gold-backed ETFs experienced widespread outflows in August, across North America, Europe and Asia, says Adam Perlaky, senior analyst at World Gold Council.
“Flows correlated with gold price movements, amid a period where the Fed pushed rates to levels last seen during the global financial crisis and the dollar reached highs that we have not observed for nearly 20 years.”
Gold could shine again as recession fears grow, as it offers downside protection, Mr Perlaky adds.
“Historically, it has been one of the best-performing assets amid those market conditions.”