Novice Investors: How To Manage Inflation In 2025

Inflation is a top concern among individual investors, according to a recent survey by Natixis Investment Managers. Half (50%) of investors cited inflation as their top investment concern and 51% rated it their top financial fear.

As the August 1 reinstatement of reciprocal tariffs approaches, it’s a good time to refresh what you know about inflation, how it affects your wealth and strategies for protecting yourself.

Inflation Basics

Inflation is a rise in average prices. As prices go up, the purchasing power of the dollar declines. In other words, with higher prices you need more money to buy the same amount of goods. Here are some useful inflation facts to know:

1. Inflation is measured primarily by the Consumer Price Index or CPI.
2. The Bureau of Labor Statistics publishes the CPI data monthly to track how prices for a range of goods and services changes over time.
3. In the U.S., the target inflation rate is 2%. The Federal Reserve manages interest rates and the money supply to manage inflation and promote maximum employment.
4. Since September 2021, inflation in the U.S. has ranged from 9.06% in June, 2022 to 2.31% in April, 2025.
5. The latest inflation reading for June was 2.67%. This means prices in June were 2.67% higher than 12 months earlier.

Inflation’s Effect On Investments

Inflation reduces the benefits of investment returns. If you think of wealth as the amount of purchasing power you have, inflation and investing are opposing forces. This is why investors commonly review their inflation-adjusted returns—because that value represents a truer representation of the wealth created through investing.

The formula for inflation-adjusted return is: [(1+investment return)/(1+inflation rate)]-1. If your account grew 12% while the inflation rate was 2.5%, your inflation-adjusted return was 9.3%. You can also simply subtract the inflation rate from your investment return for a less accurate, but simpler calculation. In this case, this shorter formula is 12% minus 2.5%, or 9.5%.

Inflation Management Strategies

Normal inflation is usually manageable when you are working—because you should get an annual pay raise that helps you adjust to higher prices.

Inflation becomes less manageable when it spikes or remains elevated for an extended period. The more extreme inflation cycles are particularly challenging for fixed-income families and retirees, but even working folk will see inflation stretching their budget.

Three core strategies can help you manage the effects of inflation: increase income or lower expenses, diversify your portfolio and trim excess costs from your investing program.

Increase Your Income (Or Lower Expenses)

As several sources have reported, new tariffs going into effect next month could result in noticeable price increases on everyday goods. Any increases have a range of potential downstream effects on consumer spending, corporate profits and investment returns. Still, the most immediate problem you may see is a tighter budget. And running short on grocery money can be more concerning than what’s happening in your retirement account.

To manage a near-term inflation spike, you can increase your income or lower your spending. The more you widen the gap between when you make and what you spend, the more cushion you have to absorb higher costs on coffee, clothing, appliances and home hardware. Ideas to consider include:

1. Temporarily reducing your discretionary spending: Take cheaper vacations, buy fewer clothes, eat out less.
2. Ask for a raise, promotion or more hours.
3. Pick up some gig work.

Diversify Into Inflation-Hedging Investments

Stocks hold up well against inflation over the long-term, but they can be volatile during periods of high inflation. You can soften the worst edges of the volatility by adding some investments that perform well under the stress of inflation. Options include:

1. Inflation-protected bond funds. Funds like SPDR Portfolio TIPS ETF (SPIP) and iShares TIPS Bond ETF (TIP) hold bonds whose principal value goes up and down with changes in the CPI.
2. REITs. Real estate values and rents tend to rise in inflationary times. According to REIT association Nareit, REIT dividends rose faster than inflation in all but two of the last 20 years.
3. Commodity funds. Commodity prices also go up with inflation. You can choose from funds that invest in precious metals, oil or agricultural products. Precious metal funds tend to be the simplest to understand.
4. Dividend Aristocrats. Dividend Aristocrats are stocks that have increased their annual dividends for 25 consecutive years. In inflationary times, they are often less volatile than growth stocks. Even better, the rising income can ease inflation pressures in retirement, when you are no longer receiving an annual pay raise.

Get Tax Efficient And Trim Fees

You can also boost your inflation-adjusted investment returns indirectly—by minimizing other costs that dilute performance. Two to evaluate are your taxes and investment fees.

1. Taxes: Make sure you are maximizing your available retirement account contributions before investing in taxable accounts. If you are investing in tax-advantaged and taxable accounts, look to optimize your holdings for maximum tax efficiency. Keep income-paying securities in the tax-advantaged accounts and hold long-term growth stocks in the taxable account.
2. Investment fees: You may be paying several layers of fees to invest. Funds charge expense ratios and sales fees to shareholders. Investing accounts charge administrative fees. Financial advisors charge management fees. Some of these fees are avoidable and others are not. For example, an avoidable fee is a high expense ratio on a fund when a similar fund charges a much lower expense ratio. Review the fees you’re paying and plan on phasing out the unnecessary ones.

A Long-Term Inflation Strategy

Inflation is a concern in 2025. However, managing the wealth effects of inflation shouldn’t be a short-term or temporary effort. A better strategy is to incorporate inflation protection into a diversified portfolio you can hold indefinitely. Under this approach, you won’t be moving in and out of inflation hedges—which lowers the risk of mistiming trades.

Remember, too, that inflation can become more challenging as you age. Your future self will appreciate the work you do now to add inflation resistance to your portfolio.