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Inflation is often discussed in terms of year-over-year changes, but the real impact lies in cumulative inflation, the persistent rise in prices that rarely reverses. While inflation may seem to be stabilizing, the cost of goods and services remains significantly higher than just a few years ago. This long-term increase erodes purchasing power, alters investment dynamics, and creates both challenges and opportunities in financial markets.
The Reality of Cumulative Inflation: More Than Just a Spike
At the end of 2020, inflation (as measured by the Consumer Price Index, or CPI) stood at a manageable 1.3%. However, it surged to 7.2% by late 2021 and peaked at 9.0% in mid-2022. While the current rate in early 2025 hovers around 3.0%, this decline does not mean prices have fallen only that they are rising at a slower rate.
The result? A cumulative price increase of 20%-25% since 2020, with certain categories such as rent and food seeing spikes of 40% or more. Even as inflation rates moderate, the compounding effect of inflation remains, making everyday expenses permanently higher.
This is the insidious nature of inflation: while the inflation rate fluctuates, prices rarely decline, forcing consumers and businesses to adjust to a permanently higher cost of living.
Cumulative Inflation vs. Deflation: The Lesser of Two Evils?
While inflation eats away at purchasing power, deflation the opposite phenomenon—comes with its own risks. A sustained drop in prices can lead to lower wages, weaker corporate profits, and reduced economic growth. Given these risks, governments and central banks generally prefer moderate inflation over deflation.
The only real solution to combat cumulative inflation is wage growth. Fortunately, real wages have started to climb, but it will take years for incomes to catch up with the dramatic rise in living costs.
How Inflation Impacts Investments: The Cost of Capital, Bonds, Stocks, & Private Markets
For investors, inflation creates unique challenges:
Higher cost of capital – As inflation persists, interest rates remain elevated, increasing borrowing costs and making new capital investment more expensive.
Fixed-income investments suffer – Traditional bond investing has been turned upside down. Since bond payments are fixed, inflation reduces their real value.
Stock market concentration – Public equities have performed well, but much of this growth has been driven by a handful of mega-cap technology stocks, increasing risk.
However, inflation also presents opportunities, particularly in private markets.
Private Markets: A Hedge Against Cumulative Inflation
Investors seeking inflation-resistant assets have increasingly turned to private credit, direct lending, and infrastructure investments. These asset classes provide an edge in inflationary environments due to their unique characteristics:
Private Credit & Direct Lending: Many private credit instruments have floating interest rates, meaning they adjust with inflation. As a result, they have consistently delivered inflation-beating returns.
Infrastructure Investments: Essential services like energy, transportation, and utilities tend to have built-in inflation protection through regulated pricing adjustments.
Real Assets and Private Equity: Real assets, private equity, and venture capital can provide outsized, real returns, though with varying degrees of risk.
Building an Inflation-Resistant Portfolio
The best defense against cumulative inflation is a well-diversified portfolio that includes assets designed to maintain purchasing power over time. While traditional markets have their place, private investments offer true diversification, higher yields, and inflation protection.
Key Takeaways
Inflation rates fluctuate, but cumulative inflation permanently raises prices.
The only true solution is real wage growth, but this will take time.
Traditional investments like bonds struggle, while the cost of capital rises.
Private markets, via direct lending, and infrastructure investments offer some of the best hedges against inflation.
A diversified portfolio with inflation-resistant assets is essential to preserving wealth.
Bottom line: Cumulative inflation is unavoidable, but smart investing particularly in private markets can help mitigate its effects. By strategically allocating capital to inflation-beating assets, investors can safeguard their purchasing power and ensure long-term financial stability.
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