What is your best asset?
SOARING food, petrol and energy prices will hit everyone’s spending power but what does higher inflation mean for savings and investments?
The answer depends on where you are invested, because different assets react to inflation in different ways.
SHARES
Stock markets have a complicated relationship towards inflation. So far, share prices have remained calm despite expectations that the US Federal Reserve and Bank of England will be forced to increase interest rates.As a result, Fidelity International associate director Ed Monk said: “Investors should expect greater volatility as markets work out how central bankers will respond.”
If they raise interest rates, this would eat into company profitability. However, history suggests shares fare better than other investments.
BONDS
Low-risk bonds will look less attractive if inflation takes off, because they pay a fixed rate of income. Higher interest rates would improve returns on risk-free cash, making bonds even less attractive, Monk said. “Bond investors will demand a higher return but that means bond prices will fall.” A bond price crash would be painful for many pensioners who rely on them for income.
CASH
If inflation hits 5 per cent and your high street deposit account pays just 0.01 per cent, each £100 of savings will be worth £95.01 after a year in real terms.
This makes shopping around for a best buy rate more important than ever, said Andrew Hagger, savings expert at MoneyComms.co.uk. If you can lock your money away for three years then Paragon’s fixed rate bond will give you 1.45 per cent, but this could look unattractive if interest rates rise. “Savers are stuck between a rock and a hard place,” he said.
GOLD
Gold is the classic inflation hedge, said Fawad Razaqzada, market analyst at Think Markets: “The price jumped $30 after the shock US inflation figure was released.”
Gold has jumped almost 6 per cent in the last month to $1,873 (£1,391) an ounce at the time of writing.
However gold pays no interest, and may look less attractive if savings rates improve.
CRYPTOS
Bitcoin recently hit an all-time high of $68,700 and Razaqzada said the crypto-currency rally has been partly fuelled by rising inflation.
However, Bitcoin crashed 5 per cent overnight on Monday.
PROPERTY
Any asset in limited supply tends to rise with inflation, so property prices are likely to climb even higher.
However, if interest rates rise mortgages will follow, and Barclays, HSBC, NatWest and TSB are already hiking their record-low interest rates.
Each 0.25 per cent increase could cost somebody with a £200,000 tracker or variable rate mortgage an extra £50 a month – or £600 a year.