Ignoring inflation is a bigger financial risk than Brexit and Trump

IN January 2004, Dublin Bus raised its prices to much grumbling from commuters. It would cost 85c to take the short journey from Trinity College to St Stephen’s Green. Today, more than 14 years later, the same journey costs €2.10 — a price rise of 147pc.

This is inflation. Inflation is not some abstract concept that economists write about in academic papers. Inflation is an every day concept and simply put in teenager parlance — stuff gets more expensive. The Dublin Bus example is extreme and in many ways is an outlier. The cost of living in Ireland has risen by nearly 18pc since 2004 — even with a severe recession, according to the Central Statistics Office.

Inflation is not necessarily a negative thing. It often means the economy is performing better, there are more jobs and there is confidence among the population to spend money. As long as you are aware of inflation and can mitigate it, it shouldn’t be a problem. Ignoring inflation is a bigger financial risk than Brexit, Trump, North Korea and the countless dangers investors are presented with on a daily basis.

Inflation can be addressed under two categories: income and savings.

Under the income heading, it’s quite straight forward. For salary workers, it should be handled by your employer — in theory, your wage at any level should be moving up in line with inflation. If it is not, you should pose the question to your employer as to why not. This is an easy fix and in an economy of nearly full employment, employees should be on the front foot here. The reality is Ireland is an expensive country and workers should be compensated accordingly. Although technically inflation has been subdued in Ireland since the financial crisis, there are pockets of inflation spikes specific to certain sectors. For savings, we should ask ourselves what the ultimate goal for this pot of money is. If you are saving for your children’s education, you can be almost certain that these fees will be higher than they are at present. For retirees, the risk of inflation is potentially higher.

In the US, inflation has been officially measured for over a century and the long term average rate is 3.22pc. In Ireland, we haven’t been measuring inflation for as long but many estimate it’s higher than that. In isolation, 3.22pc doesn’t sound bad — we can all live with our morning coffee moving from €2.70 to €2.80 for instance. But after 30 years the cost of living has increased an incredible two and half times.

Clearly income and savings are pools of capital which must move in line with, or better than, inflation. So how can that be achieved? If you have the resources to find the right house, building or property fund, this could get you there. Most of us do not have the resources to invest in property so thankfully there is an easier way. Between January 2004 and April 2018, a global basket of equities (Factset FTSE All-World Euro Index including dividends) would have made an investment return of 213.47pc. This rate of return will easily fund the increase in the broader cost of living in Ireland, third-level education and even a ticket for a 46A.

Investing in diversified funds or a global basket of equities should defuse inflation over the longer term. Whichever path you follow, keeping your entire savings or pension in cash is a risky strategy with respect to inflation and should not be advised.

Will Sparks is associate director with Quilter Cheviot Investment Management (www.quiltercheviot.com/ie/ private-client)

Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent