Understanding inflation to protect your wealth

I remember, back in my university days, a chapter in my economics course devoted 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 investors

Inflation is “a situation characterized by a general and sustained increase in the level of prices” (Larousse). It leads to a decline in the purchasing power of money — including that of your savings. It is a lasting phenomenon and stands in contrast to deflation.

Central banks, through their monetary policies, are responsible for maintaining moderate, stable and predictable inflation.

The European Central Bank (ECB), for example, has the sole mandate of ensuring price stability by keeping medium-term annual inflation close to 2%.

Additionally, the ECB pays attention to:

• Economic growth
• Labour market conditions
• Financial system stability (Single Supervisory Mechanism)
• The general economic policies of the European Union

In the United States, the Federal Reserve (Fed), by contrast, has a dual mandate: to ensure price stability and maximise employment.

This explains why the ECB and the Fed may adopt different positions in response to the same inflationary environment—particularly as the Fed is currently facing significant and ongoing 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. Its multifactorial nature is precisely what 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 generates inflation.
This was the situation following the COVID crisis in 2021: households, constrained during lockdowns, resumed consumption aggressively, while supply chains remained disrupted. The result was half-empty shelves, extended delivery times, and rising prices. Waiting up to 12 months for the delivery of a bicycle or a lawnmower was not uncommon.

Cost-push inflation

This arises when production costs increase.
Companies with competitive advantages can pass these cost increases on to consumers through higher prices, thereby preserving their margins. This is known as pricing power.
Cost increases may stem from factors such as rising wages (automatic wage indexation), tight labour markets, higher taxation, increased energy and raw material costs, imported inflation, and more.

Two structural trends are currently fuelling this type of inflation:

• Deglobalisation: a partial shift towards domestic production to reduce international dependencies, which structurally increases costs
• The energy transition: requiring massive investments in infrastructure (renewables, insulation, electricity grids, batteries), which is likely inflationary in the short to medium term

At CapitalatWork, we take these factors into account by favouring companies with strong pricing power and allocating a significant share to inflation-linked bonds.

Monetary inflation

This results from excessive money creation relative to the supply of goods and services.
It can stem from both expansionary fiscal and monetary policies. During the COVID crisis, governments ran substantial deficits to support businesses and households. At the same time, central banks lowered interest rates and expanded their balance sheets by purchasing sovereign and corporate debt.
This increase in money supply subsequently fuelled demand-driven inflation.

Imported inflation

Imported inflation is driven by external factors.
A typical example is the current rise in commodity prices due to the Middle East conflict. As explained above, the duration of the conflict is critical: markets initially expected a short-lived price spike with limited inflationary impact. However, concerns have now shifted towards more persistent imported inflation, which could spread throughout the economy and generate cost-push inflation (wage indexation, rising logistics costs, etc.).

Global vs. core inflation

You will often encounter these two concepts.

Global inflation includes all price components, including volatile items such as energy and food
Core inflation excludes these elements and is therefore a better indicator of underlying trends

In Luxembourg, STATEC publishes the Consumer Price Index (CPI). At the European level, this role is fulfilled by Eurostat, and in the United States by the Bureau of Labor Statistics (BLS).
In the current context, inflation rates as of May 31, 2026, compared to the first day of the Middle East conflict, are as follows:

2026	USD 31-05	USD 28-02	EUR 31-05	EUR 28-02
Global inflation	4.20%	2.40%	3.20%	1.90%
Core inflation	2.90%	2.50%	2.50%	2.40%

It is therefore not surprising that the ECB raised interest rates by 0.25% on Thursday, June 11, and that financial markets expect two additional hikes over the next 12 months.

The Fed, for its part, will meet on June 16–17 and is expected to remain on hold.

We are thus far from the rate-cut expectations expressed earlier this year—particularly by the Trump administration. On the contrary, markets now anticipate one to two rate hikes over the coming 12 months.

The four levels of inflation intensity

Inflation does not manifest with the same intensity or consequences :

• Creeping or moderate inflation (<5%): controlled price increases, potentially beneficial for the economy
• Walking inflation (5–20%): noticeable loss of purchasing power and potential economic and social tensions. This is the type observed in 2022 following COVID and the war in Ukraine, later contained by central bank action and falling energy prices
• Galloping inflation (>20%): significant erosion of purchasing power and heightened economic and social risks. For example, Turkey currently experiences inflation above 30%
• Hyperinflation (>50%): severe economic disruption and loss of confidence in the currency

Why inflation must be at the core of your wealth strategy?

Inflation directly affects your purchasing power—particularly over the long term.

Ignoring it means accepting a silent erosion of your wealth.
Understanding its mechanisms also helps explain the investment choices we make for you at CapitalatWork: selecting resilient companies, ensuring geographical