There are actually winners in inflation: by mastering these asset allocations, you can profit from the trend.

What Is Inflation Anyway?

In recent years, global prices have continued to rise, and central banks around the world have frequently raised interest rates in response. So, what exactly is inflation? Simply put, inflation is a period during which prices keep rising, and the purchasing power of your cash decreases — in other words, money depreciates.

The most commonly used indicator to measure inflation is the CPI (Consumer Price Index), which reflects changes in the prices of goods and services needed for daily life.

How Does Inflation Occur?

To understand the causes of inflation, first grasp a core logic: when the amount of money in circulation exceeds the size of the economy, too much money chases too few goods, and prices will rise.

The main factors causing inflation include:

Demand-pull: When consumer demand for goods increases, both production and prices tend to rise. As profits increase, companies will spend more, creating a demand cycle. Although this type of inflation pushes prices up, it also drives GDP growth.

Cost-push: Inflation caused by rising costs of raw materials, energy, and other inputs. During the Russia-Ukraine conflict in 2022, Europe’s imports were disrupted, energy prices soared tenfold, and the Eurozone CPI annual rate exceeded 10%. This type of inflation hampers economic growth.

Excessive money supply: Overprinting money by governments is the root of many hyperinflations in history. Taiwan in the 1950s experienced rapid price increases due to this.

Inflation expectations: When people expect prices to continue rising, they will spend early and demand higher wages. Businesses also raise prices accordingly, forming a self-fulfilling inflation cycle, which poses a major challenge for central banks.

How Do Rate Hikes Suppress Inflation?

Raising interest rates is the most common tool to combat inflation. When rates go up, the cost of borrowing increases significantly — for example, if the loan interest rate rises from 1% to 5%, borrowing 1 million yuan will cost an extra 40,000 yuan annually. This encourages people to save rather than spend, reducing market demand and causing prices to fall.

However, rate hikes come with costs: reduced demand means companies need fewer employees, leading to higher unemployment, slower economic growth, and potentially recession. The U.S. in 2022 is a typical example — to counter a 6-month high CPI of 9.1%, the Federal Reserve raised rates seven times, from 0.25% to 4.5%, causing the S&P 500 to drop 19% and the Nasdaq to plunge 33%.

Moderate Inflation Is Actually Good for the Economy

Many people fear inflation, but in fact, moderate inflation is beneficial. When people expect prices to rise, they are motivated to spend, which increases demand and encourages companies to invest, boosting production and GDP. For example, in early 2000s China, CPI rose from 0 to 5%, and GDP growth increased from 8% to over 10%.

The opposite is deflation. Japan experienced deflation after its economic bubble burst in the 1990s, with prices barely changing. People preferred to save rather than spend, leading to negative GDP growth and eventually entering the “Lost Thirty Years.”

Because of this, central banks aim to keep inflation within a reasonable range — major economies like the U.S., Europe, the UK, Japan, Canada, and Australia generally target 2%-3%, while other countries set targets between 2%-5%.

Who Benefits from Inflation?

This is a key question many overlook: inflation is very favorable to those with debt.

Although inflation erodes cash value, if you are the borrower, the amount you owe effectively decreases. For example, borrowing 1 million yuan at a 3% annual inflation rate 20 years ago to buy a house means that after 20 years, that 1 million is only worth about 550,000 in today’s money — so you only need to repay roughly half. Therefore, during high inflation periods, those who buy assets with debt — such as real estate, stocks, gold — benefit the most.

Additionally, energy companies tend to perform well during inflation. In 2022, the U.S. energy sector returned over 60%, with Occidental Petroleum up 111% and ExxonMobil up 74%, far outperforming other sectors.

Investment Allocation During Inflation

In a high-inflation environment, blindly investing in a single asset is very risky. The 2022 warning is clear: high inflation led to central bank tightening policies, causing stock markets to decline broadly, while energy stocks surged against the trend.

The correct approach is diversification. The following assets tend to perform better during inflation:

Real estate: The increased money supply during inflation often flows into real estate, pushing property values higher.

Precious metals (gold, silver): Gold is inversely related to real interest rates (nominal rate minus inflation). The higher the inflation, the better gold performs, making it a classic store of value.

Stocks: Short-term performance varies, but over the long term, returns often outpace inflation, especially in defensive sectors like energy, consumer staples, and healthcare.

Foreign currencies (USD, etc.): During high inflation, central banks tend to adopt hawkish rate hikes, causing strong currencies like the US dollar to appreciate.

A balanced allocation might be: 33% stocks, 33% gold, 33% USD. This mix allows participation in stock growth, hedges inflation through gold, and benefits from dollar appreciation, while diversifying risk.

Summary

Inflation is essentially a continuous rise in prices, but different people experience it very differently. Moderate inflation promotes economic growth, while high inflation requires central banks to raise rates, which slows the economy. The key is to recognize that: those with debt, energy companies, and property owners benefit from inflation, while cash holders passively see their wealth erode.

As investors, instead of passively suffering from inflation erosion, it’s better to actively allocate assets like stocks, gold, and USD to preserve and grow wealth during inflation. Remember, whether inflation benefits you depends on your position — this decision influences your gains in the next economic cycle.