I’ve been thinking about an interesting question lately: why do people get afraid the moment they hear about inflation, when in reality, inflation isn’t entirely a bad thing?

Let’s start with the basics. Inflation is the continuous rise in prices, which reduces the purchasing power of money. The most common indicator is the CPI. But the logic behind it is actually quite complex.

How does inflation happen? Put simply, it’s because there’s too much money chasing too few goods. There are roughly a few scenarios: when demand increases, corporate profits rise, which further boosts consumption, forming a cycle; soaring raw material costs also push prices higher—for example, during the 2022 Russia-Ukraine conflict, European energy prices rose by 10 times; uncontrolled money printing by the government is another common cause; and people expect prices to rise, so they spend in advance—ultimately pushing prices higher for real.

Here’s a key point: moderate inflation is actually beneficial for the economy. When people expect goods to become more expensive, their desire to consume increases; rising demand then drives business investment, and in the end GDP also grows. China in the early 2000s is an example—CPI rose from 0 to 5%, and GDP growth accelerated from 8% to over 10%. Conversely, when the inflation rate drops below 0, it leads to deflation. Japan in the 1990s was badly affected—people only wanted to save money and didn’t want to spend, the economy stalled, and it entered the “Lost Thirty Years.”

So central banks around the world are, in fact, working to keep inflation within a reasonable range. Developed countries such as the US, Europe, and Japan target 2%-3%, while most countries set it between 2%-5%. This way, they can enjoy the economic growth benefits brought by inflation without letting it spiral out of control.

Then how does raising interest rates relate to inflation? When a central bank raises rates, borrowing costs increase, so people are more willing to save than to spend. Market liquidity decreases, demand for goods falls, and prices naturally decline. But what’s the cost? Layoffs at companies, rising unemployment, and the possibility that the economy could fall into recession. So while raising rates can curb inflation, the risks are also significant.

When it comes to the benefits of inflation, there’s another group that benefits especially: people with debt. Think about it—if you borrowed 1 million to buy a house 20 years ago, then under 3% inflation, after 20 years that 1 million is worth only 550k in real terms, so you only need to repay about half. That’s why, during high-inflation periods, those who buy assets with debt benefit the most.

How about the stock market? With low inflation, hot money flows into stocks and stock prices rise. With high inflation, central banks tighten policy, stock prices fall. The 2022 US stock market is a textbook example: CPI rose to 9.1%, a 40-year high, the Fed continued to raise interest rates, and the S&P 500 fell 19%, while the Nasdaq fell 33%. But that doesn’t mean high inflation makes investing in stocks completely impossible—energy stocks often perform well; in 2022, the energy sector returned over 60%.

So how do you invest in this kind of environment? The key is asset allocation. Real estate tends to appreciate quickly during inflation. Gold has an inverse relationship with real interest rates, so the higher the inflation, the better gold performs. Stocks tend to outperform the inflation rate over the long term. And the dollar appreciates under the Fed’s hawkish rate hikes. A simple approach is to diversify—for example, allocate one-third to stocks, one-third to gold, and one-third to the dollar—so you can enjoy stock growth while also getting gold’s value-preservation and the dollar’s hedging effect.

Honestly, to do well with investing in an inflationary era, the most important thing is to understand inflation itself, and then allocate assets according to your own risk tolerance. Instead of blindly fearing inflation, it’s better to take action and look for opportunities that can still grow in an inflationary environment.