To analyze stock performance relative to inflation, compare the stock's return with the inflation rate over the same time period. If a stock gives 10% return and inflation is 6%, the real return is 4%. This tells you whether your investment is actually growing in value or just keeping pace with rising costs. Always aim for returns that beat inflation consistently over the long term.

What is inflation and how does it affect your investments?

Inflation is the rise in prices of goods and services over time. It reduces your purchasing power. So, if your investments grow slower than inflation, your money actually loses value. For example, if inflation is 7% and your stock gives 5% return, you're technically losing 2% in real terms.

Why is it important to compare stock returns with inflation?

Comparing returns with inflation helps you measure the *real* growth of your wealth. A stock might show 12% growth on paper, but if inflation is 8%, your real return is only 4%. Real return is what matters because it shows how much extra value your money is earning beyond rising living costs.

How to calculate real returns of a stock?

To calculate real return, use this simple formula:

Real Return = Nominal Return – Inflation Rate

If your stock returns 15% and inflation is 6%, your real return is 9%. This shows your actual wealth gain after adjusting for rising costs.

Which sectors perform well during high inflation?

During high inflation, sectors like FMCG, Energy, Pharma, and Commodities tend to perform better. These industries can pass on the rising costs to consumers, protecting their profit margins. On the other hand, sectors like IT or discretionary spending may face pressure on margins.

How does inflation affect stock valuations?

Higher inflation usually leads to higher interest rates, which can reduce stock valuations. That’s because future earnings become less valuable when discounted at higher rates. Growth stocks, in particular, may see corrections during inflationary periods. Always review PE ratios during inflation spikes to avoid overvalued stocks.

How to invest smartly during high inflation periods?

During high inflation, invest in companies with strong pricing power, low debt, and essential products. Diversify across inflation-resistant sectors and avoid overleveraged businesses. Also, look at stocks that pay dividends—they provide a steady income that can help offset inflation's effects.