Inflation is one of the biggest silent threats to your wealth. You may be earning returns on your investments, but if those returns don’t beat inflation, your money is actually losing value.
In this guide, we explain what inflation is, how it affects different investments in Kenya, and practical ways to protect your portfolio.
What Is Inflation?
Inflation is the general increase in prices over time, which reduces the purchasing power of money.
Simply put:
The same amount of money buys less in the future than it does today.
Inflation in Kenya is influenced by factors such as fuel prices, food costs, exchange rates, and monetary policy managed by the Central Bank of Kenya.
Why Inflation Matters to Investors
Many people focus only on nominal returns (the interest or profit they earn). What really matters is real returns.
Real Return Formula:
Real Return = Investment Return − Inflation Rate
Example:
- Investment return: 10%
- Inflation rate: 8%
- Real return: 2%
If inflation equals or exceeds your returns, your wealth is shrinking—even if your account balance is growing.
How Inflation Affects Different Investments
1. Cash & Savings Accounts
Impact: ❌ Worst affected
- Cash loses value fastest during high inflation
- Low interest rates often fail to keep up
💡 Holding too much cash long-term is risky.
2. Treasury Bills & Bonds
Impact: ⚠️ Mixed
- Offer stable returns
- Can struggle during high inflation
- Fixed interest may lag rising prices
However, they remain important for capital preservation.
3. Shares (Stocks)
Impact: ✅ Generally positive (long term)
Companies can:
- Increase prices
- Grow revenues
- Pay higher dividends
Stocks listed on the Nairobi Securities Exchange tend to outperform inflation over long periods—though they can be volatile in the short term.
4. Real Estate & REITs
Impact: ✅ Strong inflation hedge
- Property values often rise with inflation
- Rental income adjusts over time
REITs provide property exposure without buying physical property.
5. Unit Trusts & Mutual Funds
Impact: ✅ Depends on fund type
- Equity funds: better inflation protection
- Money market funds: safer but weaker against inflation
Choosing the right fund matters.
Inflation and Long-Term Investing
Inflation has a compounding effect over time.
Example:
- KES 1,000,000 today
- Inflation at 7%
- In 10 years, you’ll need about KES 2 million to maintain the same purchasing power
This is why not investing is often riskier than investing.
How to Protect Your Investments from Inflation
1. Invest for Growth, Not Just Safety
Balance low-risk assets with growth assets like equities.
2. Diversify Your Portfolio
Spread investments across:
- Shares
- Bonds
- Real estate
- Unit trusts
Diversification reduces inflation risk.
3. Review and Adjust Regularly
Inflation changes—your portfolio should too.
- Review annually
- Rebalance when needed
- Adjust goals as costs rise
4. Avoid Holding Excess Cash
Keep cash for emergencies, not long-term wealth storage.
5. Think Long Term
Short-term inflation spikes are temporary. Long-term investing smooths volatility and improves real returns.
Common Inflation-Related Mistakes Investors Make
❌ Ignoring inflation completely
❌ Celebrating nominal returns only
❌ Over-investing in cash
❌ Fear-driven investing
❌ Not adjusting goals for rising costs
Being inflation-aware gives you a major advantage.
Key Takeaways
✔ Inflation quietly reduces purchasing power
✔ Real returns matter more than headline returns
✔ Growth assets help beat inflation
✔ Diversification is critical
✔ Long-term investing is your best defence
Final Thoughts
Inflation is unavoidable—but losing money to it isn’t. By understanding how inflation affects different investments and building a balanced, growth-oriented portfolio, you can protect and grow your wealth over time.
Smart investors don’t just ask, “How much did I earn?”
They ask, “Did I beat inflation?”
Continue Learning on Financial.co.ke
👉 A Step-by-Step Guide to Investing in Treasury Bills & Bonds
👉 How to Build Your First Investment Portfolio
👉 Top Investing Mistakes New Kenyans Make
Stay ahead of inflation. Stay invested. 📈💡
