In managing a financial portfolio, one of the most insidious and persistent risks investors face is inflation. It erodes the purchasing power of assets and can directly affect an individual’s or institution’s ability to meet long-term economic and social objectives.
For more than a decade, we enjoyed a period of virtually no inflation, at times even marked by central banks’ deep concern about deflation and their determination to avoid it at all costs. It was a risk that almost every participant in the financial markets had largely forgotten. That changed after the pandemic, when a combination of factors emerged. Beyond a brief but exceptional spell of runaway inflation, we now find inflation firmly back on the radar in all major economies.
As a sustained rise in the general price level within an economy, inflation functions as a silent tax — one that receives far too little attention yet can, over time, significantly erode wealth.
It is a highly complex monetary phenomenon, and as a macroeconomic variable, its persistence tends to hit the most vulnerable the hardest. In this respect, there is an ethical dimension to inflation. The economy should serve people, not the other way around. The erosion of the value of money can become a subtle form of injustice when financial instruments are not designed to provide adequate protection for all investors, particularly those with more conservative profiles. It is worth bearing in mind that, through the simple passage of time, an inflation rate of just 2% would cut purchasing power by half in around 35 years.
Real investments vs nominal investments
In financial terms, a distinction is made between real investments and nominal investments. Nominal investments—such as traditional bonds or fixed-term deposits—are denominated in a monetary unit that does not automatically adjust for inflation. This means that, although the capital may appear secure in nominal terms, its real value can erode over time.
On the other hand, real investments are those that maintain or increase their value after adjusting for inflation. These include assets such as shares in productive companies, real estate, commodities or inflation-linked bonds. While these instruments may involve greater volatility, they offer better long-term wealth protection.
In the case of equities, this can mean investing in companies that create value and whose profits provide a natural hedge against inflation. In the property market, rental income is generally adjusted in line with past inflation. Inflation-linked bonds, meanwhile, update their principal each year in accordance with the inflation rate of the issuing country.
From an ethical perspective, it is important to remember that protection against inflation should not be pursued as an end in itself, but rather as a means of ensuring the fair and effective use of wealth. Investing is not merely a technical endeavour; it is also a form of shared responsibility for the common good.
When applied to inflation protection, this perspective encourages us to seek financial instruments that are sustainable, inclusive and ethically responsible without sacrificing economic efficiency. For example, investing in companies that develop renewable energy, social infrastructure or accessible technologies can constitute a real investment that not only safeguards wealth, but also places it at the service of overall human development.
In conclusion, we might say that, in the face of inflation, protecting wealth is not only a financial decision but also an act of moral responsibility.