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Intermediate · Lesson 2 of 5Inflation and what protects against it
Inflation is the general rise in prices, measured in Australia by the Consumer Price Index (CPI) from the ABS. Moderate inflation is normal; high inflation erodes cash and fixed coupons and usually pushes rates up.
Assets have behaved differently in past inflations: companies with pricing power and low capital needs have coped better; commodities and real assets have often risen; long bonds have suffered. Gold has sometimes held value over long periods but can lag for decades.
In 2022 both shares and bonds fell together as inflation surged, breaking the usual pattern where bonds cushion share falls. Vestora's Big picture screen shows inflation and how asset classes behaved.
Key takeaways
- CPI measures inflation; the ABS publishes it in Australia.
- Pricing power is a company's best inflation defence.
- In 2022 shares and bonds fell together.
Check your understanding
1. Which type of company has usually coped best with inflation?
- One with strong pricing power
- One with large fixed-price contracts
- One with high debt at floating rates
- One with falling margins
Show the answer
One with strong pricing power. It can pass costs on to customers.
2. What was unusual about 2022?
- Shares rose strongly
- Shares and bonds fell together
- Inflation was negative
- Gold doubled
Show the answer
Shares and bonds fell together. The usual diversification from bonds failed.
Go deeper
- Wikipedia: Inflation
- YouTube videos: inflation and investing explained
- Investopedia: inflation investing
- ABS: consumer price index
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