Inflation & its impact on Investments

Inflation is back in the spotlight, with prices ticking up in both the US and UK this week. While the recent rises aren’t extreme, they’ve reignited conversations around interest rates, consumer confidence, and the broader economic outlook.

For investors, inflation isn’t just an abstract economic metric, it directly affects everything from the cost of living to the real value of your savings and investments. So, understanding what inflation is and what it means for your money is important.

What is inflation? It is the rate at which prices for everyday things like food, clothes, and energy go up over time. When inflation is positive your purchasing power erodes over time.

For instance, say you have £100 in cash savings, and the inflation rate is 3.5%. After one year, prices will have increased by 3.5%, so your £100 will only buy £96.62 worth of goods. Essentially, even though your savings haven’t changed in number, they can’t buy as much as they did before.

Why does it matter for your investments? One aim of investing is to generate returns that exceed the rate of inflation, preserving and growing your purchasing power over time. When your investments grow faster than inflation, your money increases in value in real terms. This means your savings not only keep up with rising prices but actually gain purchasing power over time. For example, if inflation is 3.5% and your investments return 5%, your money is outpacing inflation by 1.5%, and the purchasing power of your original balance increases.

What’s happening to inflation at the moment? In both the US and UK, inflation has picked up slightly in recent months:

• In the US, the annual inflation rate rose to 3.0% in June 2025, up from 2.6% in May. This rise is partly linked to higher import costs, driven by new tariffs introduced earlier this year. Some policymakers, like New York Fed President John Williams, have noted that tariffs could add around 1% to inflation by early 2026.
• In the UK, inflation climbed to 3.6% in June 2025, its highest level in over a year. This uptick was largely driven by rising food and fuel costs. The Bank of England now expects inflation to peak at around 3.7% in the coming months before gradually falling back toward its 2% target.

In summary
Inflation has picked up on both sides of the Atlantic, and it continues to shape the investment backdrop. Higher inflation can delay interest rate cuts, affect consumer spending, and influence corporate profit margins - factors that ripple across equity, bond, and currency markets. Inflation might not be soaring, but it still plays a crucial role in shaping the real value of your money and influencing monetary policy.

The Noise

• Currency markets saw meaningful moves this week. The dollar has seen a structural weakening in the first half of the year but has regained some momentum this week: The Dollar Index (which measures the US currency against a basket of other major currencies), is up 1.1% week to date.

• Global equity markets ticked up this week. Despite political noise and uncertainty around future trade policies, investors stayed focused on the strength of company earnings and solid economic data. US markets hit new all-time highs off the back of strong US economic data and due to investors largely brushing off President Trump floating the idea of new tariffs.
  
  
• Bond prices fell this week, which means yields (which move inversely to prices) went up. This happened because recent economic data from the U.S. was stronger than expected, leading investors to believe that central banks might not lower interest rates as soon as they hoped.