How investors can hedge against inflation

From energy prices to food and finance, the Iran war is having an impact beyond the Middle East with inflation set to rise.

The rate of inflation had appeared to be trending downwards in recent months, but it has remained above the Bank of England’s 2% target and may now go higher due to rising oil prices and the closure of vital food supply routes in the Strait of Hormuz amid the Iran conflict.

Inflation dropped to 3% in the year to January 2026, mostly in line with analyst expectations.

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But the cost of living is likely to be affected by the war in the Middle East, as prices could rise for some products.

The UK is particularly exposed to shocks from increased wholesale energy and petrol prices as the oil price soars, which manifest themselves to consumers in the form of higher energy bills.

Energy consultancy Cornwall Insight has predicted the energy price cap could rise by 10% in July if the conflict continues to wreak havoc on global energy supply lines.

Financial markets have also been spooked with fears over trade, transport and travel in the region and what a full-scale war could mean for the economy.

Increasing inflation also reduces the likelihood of UK interest rates falling in the near future. Other financial impacts of higher oil prices could affect products such as mortgages, pensions and other investments.

Investors concerned about the latest UK inflation figures will want to know how to hedge against inflation in their portfolio.

“Inflation erodes the purchasing power of money over time and impacts the value of investment returns,” Paul O’Neill, chief investment officer at wealth manager Bentley Reid told MoneyWeek. “If my portfolio gains 8% in a year I may feel better off, but if prices have risen 10% I can afford less than I could at the start of the year.”

How can I protect my wealth against inflation?

In general terms, the best defence against inflation is a well-diversified portfolio built with a long-term approach. This implies investing across a wide range of asset classes including commodities, infrastructure and global equities.

However, according to O’Neill “equities, real estate and gold are some of the best ways to hedge against inflation” based on historical trends.

Real estate

Real estate is typically viewed as a means of protecting wealth against inflation. But even house price growth has slowed amid higher mortgage rates and increased transaction costs.

Additionally, actively investing in property in order to beat inflation isn’t an option for a lot of people as a large proportion of household wealth tends to already be tied up in a home.

Real estate investment trusts (REITs) can offer more liquid access to real estate markets, but it is worth remembering that their performance can diverge from direct property investments as they are subject to stock market volatility. Investors should factor this in when deciding whether REITs are worth buying.

Stocks and shares

According to Craig Rickman, personal finance and pensions expert at Interactive Investor, stocks and shares are one way to hedge against inflation, especially over the long term.

“If the financial goal you’re saving for is five years or more away, and you’re prepared to take some risk with your money, the stock market should offer a better option to grow your wealth and hedge against the threat posed by rising inflation,” he said.

O’Neill suggests that investors should be selective in terms of their inflation-busting investments, though.

“Household names with pricing power (Heinz (NASDAQ:KHC), for example) can often eventually pass higher costs on to consumers and restore profit margins,” he says.

Additionally, “sectors such as healthcare will likely face strong demand regardless of inflationary pressures”.

Tom Selby, head of public policy at AJ Bell, adds that it is important to remain focused on your long-term goals even if your portfolio is taking a hit.

He said: “A short-term hit to your investment value shouldn’t be a cause for alarm. When markets go through tough patches such as now – and as we have seen plenty of over the last decade – it’s important not to get swept up in a wave of panic.

“While we don’t know if the Iran war is going to be a short-lived event or prolonged, it is always prudent to give your portfolio a health check to ensure that you’re happy with the shape of it and the risks you are taking.

“Spreading these risks across sectors, geographies, and asset classes such as bonds and gold could help to limit any blows. History suggests that staying invested is a better course of action than trying to time when to go in and out of the market. If the idea of picking your own investments is a bit daunting, most firms now offer ready-made portfolios aimed at different risk preferences.”

Gold

Gold has been used as a store of value for almost 6,000 years. Investing in gold is therefore one of the most tried-and-tested means of protecting wealth against inflation. It is no surprise given the economic uncertainty and high inflation of recent months that the gold price has hit record highs.

It has, however, sold off from these highs since the outbreak of the Iran war, so it is worth bearing in mind that not even gold can guarantee to hold its value during times of turbulence.

What is the long term outlook for inflation?

Before the latest Middle East conflict, the consensus was that inflation will drop.

Forecasts from the Office for Budget Responsibility, released in March 2026 suggested that Consumer Prices Index inflation will fall from 3.4% in 2025 to 2.3% this year and 2% from 2027 onwards.

But these estimates hadn’t factored in the Iran war, which is already pushing up wholesale oil and energy prices - key factors in the inflation rate and ultimately people’s household bills.

Much will depend on the Bank of England’s own response. It is engaged in a delicate trade-off between stimulating growth by keeping rates low on the one hand and protecting against inflation on the other.

For now, that means all you can do is hedge and hope you can keep beating inflation.