Inflation, characterised by a constant rise in the price of goods and services, can significantly reduce the purchasing power of your savings. And we all know that in such an environment, it becomes imperative to look for ways to protect your capital from depreciation. Investing in assets that can offset or even exceed price increases is one of the most effective methods. In this review, we will look at various investment tools that can help protect your money from inflation, including regulated savings books, shares, property, inflation-linked bonds and other ways to diversify your assets. 

Inflation: is it worth investing during this period?

Inflation is a general and prolonged rise in the prices of goods and services. In this case, you lose purchasing power because your income does not increase and you have to pay more to buy the same thing. The higher the inflation rate, the more money you can lose, allowing your savings to ‘sleep’ in your accounts. That's why it's better to save and, for investments to be profitable, their returns should be close to the overall price increase.

How do you protect your savings from inflation?

Regulated savings books, euro funds in life insurance and shares are some of the most popular ways to protect your savings from inflation. Regulated savings accounts offer a guaranteed rate of interest but have their limitations. Euro funds, on the other hand, offer stability through investment in bonds, and their returns are gradually increasing. Equities, research shows, remain one of the most profitable asset classes over the long term.

Here are some popular ways to protect your savings from inflation:

• Regulated savings books: These are investments with an interest rate set by government authorities. The interest rate on savings ledgers such as Livret A and LDDS remains at 3% until 31 January 2025. These accounts are tax-free but have a limit on the amount and are only suitable for short-term savings;
• Eurofund in life insurance: Eurofund capital is guaranteed by the insurer and, although the yield is lower compared to savings books, it will increase due to rising government bond yields. Euro funds provide stability by replacing old low-yielding bonds with new, higher-yielding ones;
• Equities: Research shows that shares in listed companies are the most profitable asset class over the long term. Investing in equities, especially in sectors less prone to inflation, can be a good defence against rising prices.

Investing in equities in times of inflation

In times of inflation, when investment returns need to be high to compensate for rising prices, it is particularly important to be selective in your choice of assets. You should favour stocks of companies operating in sectors that are less prone to inflation. These include energy, raw materials (steel, cement, etc.), food, luxury goods and technology - these are sectors where prices are less sensitive to inflationary fluctuations and demand remains stable.

You can buy shares directly (called live stocks) or through equity funds such as mutual funds (FCPs) or open-ended investment companies (Sicavs). Equity fund units can be held in securities accounts, in savings plans (PEA) if the funds consist of European securities, in life insurance policies or in pension savings plans (PER).

Diversification and property investments: Useful tips for investors

MAIF offers an innovative and responsible range of wealth management products developed by experts in sustainable finance. This approach emphasises the importance of diversifying the investment portfolio, including the socially responsible investment (SRI) aspect, to promote more sustainable and responsible finance.

Rental property is considered a good investment in times of inflation as rents are indexed to price rises. However, there are caveats: in large cities, rents can be capped and tenants' debt often increases due to a decrease in their purchasing power. Inflation also manifests itself in higher property maintenance costs and agency fees, and rising ECB interest rates make mortgages more expensive.

Inflation-linked bonds

Inflation-linked bonds (ILBs) are debt instruments whose principal and coupon change in line with the rate of inflation.  Such bonds are most often issued by governments. Bonds or units of bond funds consisting of a basket of bonds can be bought and placed in a securities account and held in a life insurance policy or retirement savings plan (PER).

Hyperinflation is a rapid and uncontrolled rise in prices that can reach over 50% per month. This phenomenon can be caused by war, natural disasters, political instability or default on public debt repayments. Under such conditions, the currency depreciates and savers lose their savings. Famous examples of hyperinflation include Russia after the Bolshevik Revolution, Germany after World War I, Hungary in 1946, Yugoslavia in 1994 and Zimbabwe in 2008.

In hyperinflation, it is advisable to invest in tangible assets such as gold or property as money loses its value. Diversification of investments is key to reducing the risk of loss and maximising returns. A sensible allocation of funds between different asset classes such as stocks, bonds and real estate can protect savings from economic fluctuations and inflation.

Conclusion: What should I do with my money during inflation?

Inflation can significantly reduce the purchasing power of your savings and can be a challenge for any investor, but knowing the right strategy can not only preserve but also increase your savings. Regulated savings accounts, Euro funds, shares and property can all be part of a successful investment plan. Don't forget the importance of asset de-versification to protect your capital in times of economic instability. 

Wilfredo Huppert

Legal expert with 30 years of experience.