Inflation is the economic buzzword of the moment. In the 12 months ending December 2021, the UK experienced general consumer price inflation of 4.8%, according to Office for National Statistics.
So what is inflation and how are investors taking steps to protect their investment portfolio from it?
A quick definition of inflation is that it’s a general increase in the price of goods and services that you buy every day. The official Consumer Price Index (CPI) of inflation comprises thousands of items purchased by the British public and aims to be a representative figure that tracks if it becomes more expensive to buy those items.
Some items rise in price over time, and some actually fall in price. It’s the combination of all these movements within the index that produces the single-digit figure describing the change in aggregate price levels. As stated above, in 2021 this was 4.8%.
Inflation and investments
Inflation doesn’t directly attack the pound value of any investments you may hold in your portfolio. Stable savings bonds or other monetary assets may remain valued at exactly the value you predicted based upon the interest rate and other factors.
The way inflation impacts investments is more insidious. It doesn’t produce a fall in the £ value of your balance, but it means that your investments simply can’t buy as much. There in real terms, (which means considering what your money can actually buy) a stable or even growing pot of savings & investments may buy less at the start of the year than at the end. It can be therefore said that in real terms you have suffered a loss.
We’ll now explain 4 quick solutions that investors use to offset the impact of this fall in spending power. Nothing can be done about consumer prices themselves, but investors can pick savvy investments to hopefully ‘keep ahead’ of a high inflation rate.
Search for the best-yielding savings account
Savings accounts will not be able to yield enough interest to stay ahead of a 4.8% inflation rate (the best-buy savings bonds at the time of writing offer 1.5% – 2%), but comparing the market and switching to the highest paying bank account and the best high-yield savings accounts could reduce the impact inflation has upon your cash savings.
In an inflationary environment, you need to be sure that every pound is being put to use and isn’t languishing in a 0% interest current account.
Invest in real assets such as property and equities
If you can’t beat inflation – join it! This is why financial advisers sometimes recommend buying ‘real’ assets such as property and the shares of companies. When prices are generally rising across the economy, these assets will be no different. Therefore, by shifting some of your money into assets that will also inflate in value, you will hopefully hedge the risk. Please be aware that these investments contain other risks which you would be fully aware of before investing. Shares are volatile investments and it’s very possible that they may underperform the inflation rate over the short term.
Consider alternative investments such as commodities like gold
Alternative investments such as gold bullion are another example of a real asset. Gold also has a history of being favoured by investors as a way to escape inflation. This reinforces the surge in gold’s price during inflation periods, as many investors dump their cash savings accounts and fly into the gold material.
Increase your deposits into your portfolio, in line with increases to your salary
A common mistake for investors is that they fail to increase their monthly deposits into their stockbroker account in line with any pay rises they receive. During inflationary periods, employers often increase the annual pay raises to their workforce to help their employees maintain spending power. If you are a fortunate recipient of such a pay rise, be sure to pass some of it onto your monthly direct debit.
Overall, these 4 solutions provide ample opportunity for investors to escape inflation. Inflation is here to stay, so the best we can do is pragmatically change our investment approach to ensure we don’t bear the wrath of it.
