Inflation steadily erodes the purchasing power of consumers — and it impacts investors as well. Even if your investments earn a return, their real value — meaning what your money can buy in the future — may decrease if that return is lower than the inflation rate. In this context, stocks stand out as one of the best long-term tools to preserve and grow real wealth.
The Problem with Fixed-Rate Investments
Fixed-income investments like government bonds, Guaranteed Investment Certificates (GICs), or high-interest savings accounts are often viewed as safe choices. They offer predictable interest and protection of capital.
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However, the main drawback is that they do not always keep up with inflation. If the interest rate is lower than inflation, the investor experiences a loss in real terms.
If a GIC pays 3% per year, but inflation is running at 4%, your real return is -1%. This means your purchasing power shrinks each year, even though the account balance grows.
Stocks: An Asset That Adjusts
Stocks represent ownership in businesses. These businesses often have the ability to raise prices in response to rising costs. In other words, when input costs go up (raw materials, wages, energy), a company can increase the prices of its goods or services to maintain profitability.
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Revenue growth
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Higher net profits
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Increased stock values
As a result, over the long term, stocks of profitable companies tend to keep pace with — or outperform — inflation, delivering a positive real return.
Not all companies are equally equipped to handle inflation. Some sectors tend to be more resilient when prices rise:
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Consumer staples: food, household products, personal care
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Energy: oil, gas, electricity
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Utilities: often indexed or regulated for cost recovery
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Real estate: landlords can adjust rents over time
These sectors can more easily pass rising costs on to customers, helping them preserve — or even grow — their margins during inflationary periods.
Investing in stocks also gives you the benefit of compounding returns: earnings (like dividends and capital gains) can be reinvested to generate even more gains. Combined with long-term economic growth, a well-diversified stock portfolio can grow significantly over decades.
Historically, stock markets have delivered average real returns of 5% to 7% annually, after accounting for inflation — far exceeding most fixed-income products.
It’s important to note that stocks are volatile. Their prices can swing significantly over short periods, especially during recessions or geopolitical uncertainty. But for long-term investors — like those saving for retirement 20 or 30 years down the road — this volatility is the price of admission for higher returns.
Stocks offer a natural hedge against inflation because companies can raise prices, protect profits, and continue growing. Unlike fixed-rate investments, which can deliver negative real returns when inflation is high, stocks — if selected wisely and held over time — can grow your net worth and preserve your purchasing power.
For any balanced investment strategy, especially in inflationary environments, including stocks is a smart and strategic decision.