Inflation: The Enemy That Never Retreats — But Also a Hidden Ally for Property Investors

For more than a decade, inflation seemed like a forgotten relic, with prices around the world staying comfortably low.

Measured as the year-on-year change in the price of a basket of goods, inflation was so subdued that many investors stopped worrying about its impact on their money’s purchasing power.

The slow creep of price increases barely registered in the minds of consumers and investors alike.

However, make no mistake: inflation is the number one enemy of the long-term investor.

It may have seemed like this dragon was hibernating, but it woke up in a foul mood recently.

Starting in early 2021, inflation roared back to life, driven by extensive government stimulus, COVID-19 supply chain disruptions, and geopolitical tensions.

By late 2022, inflation hit levels that many Australians had never experienced in their lifetimes.

Consumers were forced to adjust their budgets significantly to accommodate skyrocketing living expenses.

Temporary respite, permanent scars

In response to rising inflation, central banks worldwide aggressively hiked interest rates to tame the price beast.

The cost of borrowing surged, and as money became more expensive, demand for goods and services slowed.

While this put a lid on runaway prices, it also made debt more expensive to service, particularly for those property investors with variable interest rates.

Today, inflation has cooled, and many economies are reporting more "normal" inflation levels.

This has been a relief to many, as it could pave the way for central banks to start lowering interest rates again.

It’s taking a little longer in Australia for inflation to fall back to the RBA preferred range of 2 to 3%, but slowly but surely it is happening.

However, while the headlines might be celebrating, it's critical to remember that inflation’s impact is often long-lasting.

Lower inflation doesn’t mean prices drop; it just means they stop rising as quickly.

We’re left with a new, higher baseline.

Looking ahead: lessons from the inflation surge

One key lesson from this recent bout of inflation is that while it may be temporary, the price increases are here to stay.

Inflation doesn’t just quietly exit the stage once it’s played its part; it leaves behind a legacy of higher costs that shape our financial landscape moving forward.

So, rather than hoping that the inflation of the past few years doesn’t repeat itself—a hope that seems unrealistic—it’s better for investors to adapt and learn from this period in three practical ways:

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1. Reassess your spending habits:

Okay, start by evaluating your personal spending.

Are your purchases aligned with what truly adds value to your life, or are you spending on things that don’t bring you real happiness?

Living within your means remains a cornerstone of financial success.

2. Set realistic expectations:

Are your investment plans based on overly optimistic assumptions about inflation and interest rates staying low?

Even though interest rates are going to fall over the next year or two, mortgage rates will still likely be much higher over the next decade than they were over the last decade.

It’s important to position your finances to endure periods of higher inflation, rather than assuming they’ll always be as benign as they were in the past decade.

3. Invest in inflation-resilient assets:

One of the best defences against inflation is investing in assets that can outpace it over time.

Historically, well-located properties have grown in value faster than inflation.

Why property investors can smile in the face of inflation

Here’s where inflation becomes a friend rather than a foe for property investors.

While inflation erodes the value of money, it also reduces the real value of debt.

This means the money you owe on your mortgage is effectively worth less over time, while the value of your property—being a tangible asset—tends to increase.

This dynamic creates a dual advantage: your debt gets cheaper in real terms, and your asset grows in value.

So, while inflation may feel like an enemy as it chips away at purchasing power, for those holding real assets like property, it’s also a silent partner, working behind the scenes to boost your wealth.

The trick is to stay invested in growth assets, like property, that not only preserve your wealth but enhance it over time.

In the end, inflation doesn’t have to be the villain of your financial story.

By understanding its dual role, you can position yourself to not only survive but thrive, turning this supposed enemy into a powerful ally on your wealth-building journey.