High inflation: Where should you invest?

Inflation is at the highest rate it’s been in decades, and every working Kiwi will be wondering how to keep rising prices from negatively affecting their investments.

Lara Maloney

Lara Maloney

17 June 2022


Inflation may be a fact of life, but it doesn’t have to dictate your future. With the right advice and the right financial moves, high inflation doesn’t have to be a challenge – it may even be an opportunity.

What is inflation and why does it matter?

Inflation is a phenomenon where money loses purchasing power over time. It’s why $100 in 1950 would buy you a lot more than $100 in 2022.

Inflation is usually small and deliberately controlled by organisations like the Reserve Bank through things like the Official Cash Rate (commonly referred to as “the OCR”) and quantitative easing. The Reserve Bank generally tries to keep inflation between 2% and 3% a year – meaning that $100 this year would have the same purchasing power as $102 the following year. Ever heard the saying “A million dollars isn’t what it used to be”? That’s the power of inflation.

Some years, inflation is larger, and it appears that 2022 is on track for being one such year. Inflation in the March 2022 consumer price index (a general measure of how much a typical ‘basket of goods’ costs) was 6.9%, a 30-year high.

This means that, compared to the final months of 2021, the cash in your bank account will buy 6.9% less than before. This has obvious implications for day to day life, but it may also impact your investment plans.

Periods of high inflation generally have a dampening effect on a wide range of different investment classes. When people have to tighten their belts because life essentials are more expensive, they have less to grow their wealth (and the economy) with, and so overall economic growth slows.

But not all investments are affected the same way. Inflation is one of the reasons why a well-balanced portfolio, made up of multiple different kinds of investments, is so important to successful wealth building. It’s all about hedging your bets – or in this case, hedging against inflation.

Where should I invest during periods of inflation?


Inflation risk: High

Cash is likely the best known investment asset class, but it’s also one of the most vulnerable to damages from inflation, whether it’s in physical cash or in a bank account.

Cash in a bank account does earn a small amount of interest every year but this rarely keeps up with inflation. At the time of writing, even during a controlled inflation year of 2% or 3% inflation, the savings rates wouldn’t keep up. It offsets the loss from inflation, but it doesn’t remove it completely.

If you have investments in cash during periods of high inflation, you must accept that it’s going to lose value. This doesn’t mean you shouldn’t have any investment in cash though.

One of the main benefits of cash is that it’s liquid. Unlike stocks, shares, property and fixed interest, you can access it immediately. This makes it attractive for certain kinds of investors and people with certain risk profiles. Many investors have at least a chunk of change in cash for emergencies or opportunities. This is why it’s wise to keep at least some cash on hand – though inflation should make you re-evaluate how much.

One important caveat on cash that’s specific to the New Zealand environment. The Official Cash Rate is going up, and the Reserve Bank has noted that they will continue to increase it. When the OCR goes up, savings rates also tend to increase, with a slight lag time. We may soon see savings rates that are more attractive than the rock-bottom returns that we see currently – so keep an eye out for good deals.

Fixed Interest

Inflation risk: High

Fixed interest investments such as term deposits and government bonds are in much the same boat as cash during periods of high inflation. You lock your investment away for a fixed period of time and get a fixed return at the end of that period, during which you can’t access your investment without paying a penalty.

The rate of return is generally higher than a savings account, but not by much – and because you generally have a term of several months to several years, short-term inflation spikes can seriously damage your progress.

For example, if you set aside $50,000 in a 2-year term deposit, you might get a 3% p.a. return. But in just a few short months, inflation has already hit close to 7%. Now, your $50,000 is worth less and you can’t draw it down to invest elsewhere without losing even more in penalty fees. You may end your term deposit with less purchasing power than you put in.

Long-term bonds (up to 5 years) are at the highest risk of this downturn in value and opportunity loss. Short-term bonds (up to 1 year or less) are more resilient. Once they mature, they can be reinvested elsewhere. But they also have lower upfront returns than the long-term options, so it’s a toss-up between flexibility and higher returns.

Another important point for New Zealand. The Official Cash Rate is increasing, and just like savings accounts, fixed interest return rates also generally increase alongside. Long-term fixed interest may lock you in with a lower rate than you might achieve by regularly recycling and reinvesting a short-term equivalent. This is an important point of difference that you may want to consider with your investment strategy during high inflation.


Inflation risk: Moderate

Commodities can be a very lucrative investment, but they are also typically highly volatile. Investments in energy, agriculture, industrial metals, livestock and, of course, precious metals like silver and gold (a very popular hedging instrument against fiat currency), are very dependent on supply and demand. A change in the balance of either one can result in large profits or significant losses.

During periods of high inflation, the value of raw materials like oil, metals and agricultural products generally increase. This makes them a good hedge. However, their risky nature makes them a poor standalone investment – particularly if you don’t already have a solid foundation of safer assets.

Furthermore, it’s tough for the average New Zealander to invest in commodities. For the most part, they are out of reach for mum-and-dad wealth builders.

Speaking of gold, it’s impossible to talk about inflation hedges without mentioning it. Generally speaking, gold can protect against inflation, but only in the long term (decades, not years). It’s too volatile to protect reliably against short-term inflation.

Property & Real Estate

Inflation risk: Low

Traditionally, real estate is one of the asset classes that perform especially well during periods of inflation. Inflation generally means that property prices increase, resulting in good equity gains that can be leveraged to invest elsewhere (if owned directly) or good increased income flow (if invested through dividend-paying ETFs or similar investment vehicles).

It’s also important to remember that inflation reduces the value of currency, so it also reduces the value of debt. This means that any home loans you have are actually lower in nominal terms after adjusting for inflation. Assuming you can keep your income growing at the same rate of inflation, this can be a great way to eat away at the value of your debts and increase your wealth.

However, we must again take a look specifically at New Zealand and its current economic climate. Multiple banks and financial institutions are predicting mortgage rate increases over the coming years, which may have an impact on the availability of credit (particularly with recent increased scrutiny in the form of CCCFA changes), and thus on the value of property. Some banks are even outright predicting property value drops: some to the tune of 20 per cent over the course of 2022 and 2023.

This may sound concerning, but New Zealand has experienced a huge growth in property prices in recent years, and it’s not surprising that there is going to be a correction. Smart real estate investment is always purchased with the long term in mind, and a couple of years of lowered prices may be countered in the long term. Just take a look at the Global Financial Crisis, where property prices dropped 10% in a year. Ten years later, values had almost doubled. Historical performance doesn’t always indicate future performance – but there’s a reason why property is so popular as an investment class, even during periods of inflation.

Stocks & Shares

Inflation risk: Moderate

For some businesses, inflation is a big problem. For others, it’s not a concern – sometimes it’s even an opportunity.

The big challenge for most businesses is their pricing power. If they are able to sell a product or service at a rate matching (or beating) inflation, then the real impacts of inflation may pass them by. In fact, inflation may offer them the opportunity to secure more favourable deals with suppliers or cut costs elsewhere in the business, increasing their own bottom line and thus the value of your investment in them.

If inflation is only affecting your own country and not elsewhere, overseas shares offer an excellent way to avoid inflation problems entirely. If New Zealand has high inflation, you can simply purchase Australian shares instead, for example. Currently, inflation is striking globally, so this is less of a consideration – but it’s useful to keep in mind for future possible inflation spikes.

Investing in single companies can be risky. This is why many investors prefer to buy exchange traded funds, or ETFs, instead. These provide you with parts of shares in multiple companies, usually to a specific theme, such as size, industry, or dividend payments. This gives you instant portfolio diversification – something that’s very important generally, but especially during volatile periods of high inflation.

When will inflation end?

Inflation is a fact of life. It can’t be stopped, only managed, and even then, it’s tough to predict when inflation will be higher than average. Currently, high inflation is a global phenomenon, but with Reserve Banks and their counterparts all over the world working towards getting it back under control, it’s unlikely that this period of high inflation will last.

High inflation can be stressful, but it’s important to remember that it’s temporary. Stay calm, review your goals and your strategies to account for this blip, and if you’re feeling anxious or in need of extra support, make sure you speak with your financial advisor.

Looking for more advice on investing during inflation to achieve your long-term financial goals? Get in touch with our team for a free Discovery session and take control of your future – no matter how high inflation may be.