How to protect your portfolio from inflation
Seen the price of fuel lately? You don't need to be an economist to work out that skyrocketing costs at the bowser are set to push inflation higher.
We've already seen interest rates rise because of inflation - 3.7% for the 12 months to February 2026. And there are suggestions inflation could surge higher.
Westpac is forecasting inflation will peak at 5.5% over the coming months. The Commonwealth Bank expects it to reach around 5.4% by mid-2026, and then "moderate" next year.
Of course, a lot hinges on what happens in the Middle East.
As investors, it is natural to be concerned about the impact of steeply rising prices. So, let's take a look at what you can do to protect personal wealth.
Why does inflation even matter?
'Inflation' refers to the way prices move over a given time period. In Australia, it's measured by the Consumer Price Index (CPI).
As consumers, inflation reduces our purchasing power. For investors, inflation can be more damaging.
When prices rise, the purchasing power of our money falls. Even if your portfolio balance remains the same in dollar terms, it can be worth less in 'real' (after-inflation) terms.
The higher inflation is, the harder your money has to work just to keep pace.
For example, if an investment generates a return of 5% and inflation is 4%, your 'real' return is just 1% (5% less 4%).
The obvious solution is to invest in assets with higher returns. The problem is that higher returns go hand-in-hand with higher risk. And that may not suit everyone.
Fortunately, there are steps you can take that don't involve ramping up risk.
Look for a healthy rate on savings but don't see cash as a long-term solution
In response to stubbornly high inflation, the RBA raised interest rates in March. It could hike again in May (there is no April rate decision), when higher fuel costs will be reflected in CPI numbers.
The upside to rising rates is better returns on many savings accounts.
Across accounts that don't impose conditions on withdrawals and deposits, you could earn around 4.85%.
This definitely makes it worth checking the rate you're currently earning on spare cash.
However, that doesn't mean your whole portfolio should be sitting in cash.
Remember, your money needs to outpace inflation to retain its purchasing power. On an account earning 4.85%, at today's 3.7% inflation you're only earning a 'real' (after inflation) return of 1.15%.
The other drawback is that returns on cash are fully taxable. A high income earner could lose close to half their interest earnings to tax meaning the real value of cash investments will go backwards quite quickly.
The upshot is that while it makes sense to have savings - in particular for retirees and conservative investors, cash has historically been a wealth destroyer for investors during periods of higher inflation.
Diversify across asset classes
Diversification remains an investor's best protection against inflation.
Different asset classes - shares, fixed interest (like bonds), commodities and property, each behave differently in inflationary environments. Holding a mix of investments reduces the risk that inflation will erode away your entire portfolio.
Equities have historically provided strong long-term protection against inflation. Some listed companies can pass higher costs on to consumers through price increases. Others, with strong pricing power, consistent demand and low debt, tend to be more resilient during inflationary periods.
Well-located property is a classic hedge against inflation though it requires large amounts of money. As inflation increases, you have to plan to make higher interest repayments. For property investors, CPI-based rent increases, potential tax deductions and the fact that inflation reduces the real size of your mortgage over time, makes property an attractive inflation hedge.
Regardless of which asset class you wish to hold, exchange-traded funds (ETFs) are a great solution. They provide instant diversification with minimal effort, and ETFs span all the major asset classes.
Be mindful of costs
During inflationary times we tend to look closely at where our money is going. I don't know about you, but I'm quickly working out the cheapest servos in my area.
Now is the time to apply that same level of scrutiny to the fees you're paying on investments.
The strength of ETFs is that many are 'passively' managed. They aim to replicate the returns of a given index, and so the fees are extremely low.
In the current environment, it can be tempting to try to beat the market by investing in actively managed funds even though they typically charge higher fees.
However, the latest SPIVA Australia Scorecard confirms that in 2025, 74% of actively managed Aussie share funds failed to match market returns, while 70% of active global share funds failed to outpace the market.
Long story short, be mindful of the cost of your investments. It is fees - not returns - that are set in stone.
Don't let inflation disrupt your commitment to investing
All Australians are feeling the squeeze of higher fuel costs. And we'll likely see the cost of other essentials rise in the weeks ahead. Household budgets will be stretched.
Where possible though, I encourage you to keep adding to your portfolio on a regular basis.
Vanguard has done some terrific research on the value of regular investing. It found that $10,000 invested in Australian shares back in 1980 would be worth $1.13 million today. If an extra $250 had been added to the same portfolio each month, it would have grown to $3.58 million. Make it $500 in monthly contributions and that same portfolio would now be worth more than $6 million.
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Source: Vanguard
We will get through this
Whether it's a crisis caused by a pandemic such as COVID, a collapse of business confidence or an energy crisis caused by a war far away from us, the best solution for investors remains diversification.
By making spare cash work hard, diversifying across asset classes, being mindful of fees and aiming to grow your investments where you can, it's possible to build a portfolio that is as crisis-resistant as possible - one that doesn't just keep up with inflation, but over time stays comfortably ahead of it.
Frequently Asked Questions about this Article…
Inflation is the rise in prices over time (measured in Australia by the Consumer Price Index, or CPI). It erodes your purchasing power so even if your portfolio's dollar value stays the same, its real value can fall. For example, a 5% investment return with 4% inflation leaves you a real return of just 1%.
The article notes Australian inflation was 3.7% for the 12 months to February 2026. Major banks forecast higher near-term peaks: Westpac expects inflation to hit about 5.5% in the coming months, while the Commonwealth Bank forecasts around 5.4% by mid‑2026 before moderating. The outlook is also sensitive to international events, such as developments in the Middle East.
While rising interest rates have lifted savings rates (the article cites around 4.85% on easy‑access accounts), cash is not a long‑term solution. At 3.7% inflation that 4.85% yields only about a 1.15% real return, and interest is fully taxable—high earners could lose close to half of interest to tax. Cash can be useful for short‑term needs or conservative retirees, but historically it can erode wealth during sustained inflation.
Different asset classes typically respond differently to inflation. Shares, bonds, commodities and property each behave in their own way, so holding a mix reduces the chance inflation destroys your whole portfolio. Equities have historically provided strong long‑term protection because some companies can pass costs to consumers. Well‑located property can be an inflation hedge via CPI‑linked rent increases and the shrinking real value of mortgages.
Yes—ETFs are highlighted as a practical way to build inflation resilience. They offer instant diversification across asset classes with low fees, and many are passively managed to track indexes. That combination can help lower the cost of investing while spreading inflation risk.
Fees matter—especially when inflation is squeezing returns. The article cites the 2025 SPIVA Australia Scorecard showing many active managers underperformed: 74% of active Australian share funds and 70% of active global share funds failed to beat their market benchmarks. Since fees are certain while outperformance is not, keeping costs low can help protect net returns.
Yes. Regular investing is an effective long‑term strategy even in inflationary times. The article references Vanguard research showing $10,000 invested in Australian shares in 1980 would be worth about $1.13 million today; adding $250 a month would have grown that to $3.58 million, and $600 a month to over $6 million. Consistent contributions can compound returns over time.
Practical, article-supported steps include: make spare cash work harder by checking competitive savings rates; diversify across shares, bonds, property, commodities and ETFs; favour low‑fee solutions where possible; avoid dramatically increasing risk just to chase higher returns; and keep contributing regularly to harness long‑term compounding. These measures help build a portfolio that aims to keep pace with — and over time outpace — inflation.
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