Understanding inflation to protect your wealth

I remember, back in my university days, a chapter of my economics course dedicated to inflation. At the time, I never imagined that this concept would become so omnipresent throughout my career as a Wealth Manager.

What is inflation? Definition and implications for savers

Inflation is “a situation characterised by a generalised and continuous rise in the price level” (Larousse). It leads to a decline in the purchasing power of money — including that of your savings. It is a long-term phenomenon and is the opposite of deflation.

It is the central banks which, through their monetary policies, ensure that inflation remains moderate, stable and predictable.

The European Central Bank (ECB) therefore has the sole objective of ensuring price stability by keeping the annual inflation rate close to 2% in the medium term.

Incidentally, the ECB will be keeping a close eye on:Accessoirement, la BCE sera attentive :

• to economic growth,
• the quality of the labour market,
• the stability of the financial system (Single Supervisory Mechanism),
• or the European Union’s general economic policies.

In the United States, however, the Federal Reserve (Fed) has a dual mandate: ensuring both price stability and full employment.

This explains why the ECB and the Fed may respond differently to the same inflationary environment. It is also worth noting that the Fed is currently subject to significant and persistent political pressure from the Trump Administration, challenging the long-standing principle of central bank independence.

The four main drivers of inflation

Inflation rarely has a single cause. It is precisely this multifactorial nature that makes it difficult for central banks and governments to manage.

Demand-pull inflation

This occurs when demand for goods and services exceeds supply.
In other words, scarcity creates inflation.

This was the situation in the aftermath of the COVID-19 crisis in 2021: households, constrained during lockdowns, resumed consumption strongly while supply chains remained disrupted.
The result was half-empty shelves, extended delivery times, and consequently rising prices. It was not uncommon to wait up to 12 months for the delivery of items such as bicycles or lawn mowers.

Cost-push inflation

This arises when production costs increase.
Companies with competitive advantages can pass these higher costs on to their selling prices, thereby maintaining their profit margins. This is known as pricing power.

These cost increases may stem from rising wages (including automatic wage indexation), tight labour markets, higher taxation, increasing energy or raw material prices, or imported inflation.

Two structural trends are currently fuelling this type of inflation:

• Deglobalisation, as part of efforts to reduce international dependencies by partially relocating production domestically, is inherently inflationary from a cost perspective. This is a long-term trend that must now be incorporated into inflation expectations.
• The energy transition, which requires massive investment in infrastructure (renewables, building insulation, electricity grids, batteries, etc.), is likely to be inflationary in the short to medium term.

At CapitalatWork, we take these dynamics into account by prioritising companies with strong pricing power in our investment strategy and allocating a meaningful share to inflation-linked bonds.

Monetary inflation

This results from excessive money creation relative to the supply of goods and services. The expansion of the money supply can arise from both accommodative fiscal and monetary policies.

During the COVID crisis, governments generated substantial deficits to support businesses and households. At the same time, central banks lowered interest rates to facilitate access to credit and expanded their balance sheets by purchasing sovereign and corporate debt.

This increase in the money supply subsequently fuelled demand-pull inflation.

Imported inflation

Imported inflation stems from external factors.
A typical example is the current rise in raw material prices linked to the conflict in the Middle East.

As noted above, the duration of such conflicts is crucial in assessing their inflationary impact. Initially, markets expected the conflict to be short-lived and anticipated only temporary price increases.
Today, concerns have shifted towards more persistent imported inflation, which could spread throughout the economy, triggering broader cost-push inflation (through wage indexation, higher logistics costs, and so on).

The four levels of inflation intensity

Inflation does not manifest with the same intensity or consequences depending on its level:

• Creeping or moderate inflation (<5%): controlled price increases, generally considered beneficial for the economy.
• Moderate-to-high inflation (5–20%): a noticeable loss of purchasing power, potentially generating economic and social tensions.
  This is the type of inflation experienced in 2022 following the COVID crisis and the war in Ukraine, which was eventually contained through central bank interventions and declining energy prices.
• Galloping inflation (>20%): significant erosion of purchasing power and increasing risk of economic and social instability. Turkey, for example, is currently experiencing inflation levels above 30%.
• Hyperinflation (>50%): severe economic disruption and a loss of confidence in the currency.

Why inflation must be at the heart of your wealth strategy

Inflation affects your purchasing power — and, in particular, the value of your savings over the long term. Ignoring this phenomenon means accepting a silent erosion of your wealth.

Understanding how these mechanisms work also helps us better understand the investment decisions we make on your behalf at CapitalatWork: selecting resilient companies, geographical diversification, and instruments to protect against rising prices.