It’s now three years since the cost of living crisis began to grip the nation. In August 2021, CPI inflation jumped to 3.2%, up from 2% in July of that year. It then climbed all the way up to a peak of 11.1% in October 2022 before gradually, and painfully, falling back to current levels.

Consumers are undoubtedly still finding things hard after such a big price shock, but the worst now looks firmly in the rear-view mirror. The inflationary crisis had a profound effect on the savings and investment landscape, and looking back on performance over the last three years, it’s clear some investments have helped investors grow their wealth in the face of rising inflation, while others have capitulated in its presence.

GOLD AND BITCOIN

Gold in particular has made good on its promise as an inflationary hedge over the last three years, carving out a healthy real return of 24.8% for investors (see table). That’s despite rising interest rates, which should in theory take the shine off the precious metal. The economic and geopolitical uncertainty of recent years has helped propel gold upwards.

Meanwhile central banks have been attracted to gold because it’s liquid, carries no credit risk, and is free from any geopolitical interference.

Gold has also trumped bitcoin over the last three years. While some may view Bitcoin as a store of value or an inflation hedge, the wild swings in the price of the cryptocurrency suggest it can’t be relied on to fill either role. In the short term, the US presidential election may exert a gravitational pull on bitcoin now Donald Trump has thrown his weight behind crypto. The longer-term investment case for bitcoin relies on it being adopted by consumers, businesses and investors, which is still a highly speculative snapshot of the future.

As ever gold remains worthy of consideration as a portfolio diversifier because it behaves differently to other asset classes, but it shouldn’t make up more than 5% to 10% of your portfolio at most. While gold is known as a safe haven, it is volatile, and despite having a reputation for being an inflation hedge, it has endured long periods of below inflation returns. Meanwhile those who wish to take a punt on bitcoin should do so with only a small amount of money which they are willing to lose in its entirety.

CASH AND GILTS

It will perhaps come as a shock to learn that against a backdrop of rising interest rates, the average Cash ISA has registered a negative real return of -12.0% over the last three years, meaning £10,000 saved would now be worth £8,802 after accounting for inflation.

That’s partly because cash rates have only risen gradually, and partly because not all accounts are offering competitive rates. Inflation has also provided a high bar in the last three years, which even the most competitive current rates wouldn’t have hurdled.

Now inflation has become more temperate, the best cash rates are offering an inflation-beating rate of return, but for long-term holdings savers are likely to get a better return from the stock market. Data from Barclays shows that over a 10-year holding period, UK stocks have beaten cash over 90% of the time.

Among other supposedly safe assets, gilts were big losers from the inflationary spiral. Low interest rates and QE pushed up government bond prices for over a decade, priming the gilt market for a big spill. In real terms gilts have lost over a third of their value in the last three years. This has had knock on effects on diversified strategies which invest in gilts such as 60-40 funds and mixed asset funds more generally.

The pain has been particularly acute and untimely for those approaching retirement in life-styled pension schemes, which hedge against annuity rate movements by investing in long-dated bonds. The typical annuity-hedging fund has lost almost half its value in real terms over the last three years, with £10,000 invested now being worth £6,306, or £5,246 after accounting for inflation. Annuity rates have risen by a similar amount but that’s cold comfort if, like 90% of retirees, you’re not buying an annuity with your pension pot.

GLOBAL AND UK SHARES

Both the global and domestic stock market have managed to stay ahead of inflation over the last three years, which given soaring price rises is no mean feat. The FTSE 100 in particular has stood up well, and its performance is in line with the global stock market. This isn’t an entirely congruous result seeing as the UK stock market has been a laggard on the international stage for a while now, but the inflationary nature of the last three years has actually helped large cap UK stocks regather some lost ground.

That’s partly because the FTSE 100 contains a large dollop of oil and gas companies, which have benefited from higher energy prices. The FTSE 100 also has more jam today stocks which prospered in the market rotation that took place when inflation started its ascent, eroding the value of more distant cash flows and the appeal of jam tomorrow companies.

The recent AI-fuelled technology rally might well have banished memories of 2022, but in that calendar year the S&P 500 fell by 8% in sterling terms while the FTSE 100 eked out a 4.7% return, an uncharacteristically favourable performance wedge for the UK stock market.

Overall, these performance figures show the inflationary crisis interrupted trends which had been going on since the aftermath of the financial crisis, in particular puncturing the invulnerability of technology stocks and bonds. The tech sector has since reasserted its dominance, but bond yields remain much higher than they were. These yields are much more normal by historic standards though, and while the increase has been painful for bond holders, these assets now at least offer a reasonable level of return for those looking for income in the here and now.

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