Western Daily Press (Saturday)
Smart ways to help you defeat inflation
HARVEY JONES LOOKS AT THE RISING THREAT TO OUR SAVINGS AND INCOME – AND WHAT WE CAN DO ABOUT IT
IF you can remember the 1970s you will know how much damage inflation does to your wealth, and will be alarmed by signs that it’s returning after more than 40 years.
Annual price growth more than doubled last month, from 0.7% to 1.5%, and some reckon it could soon blast through 2.5%.
Consumer price growth is still low by historical standards, but it has hit a 10-year high of 4.2% in the US, and we could follow.
Inflation has been called the “silent assassin of wealth”, and it is bad news for older people living on their savings, those who have lost their jobs or have seen their earnings fall in the last year.
So why is inflation on the way back – and what can you do about it?
UP, UP, UP!
As with so many things, you can blame the pandemic. Rob Morgan, chief analyst at stockbroker Charles Stanley, said the economy is rebounding as people splurge after lockdown.
“Central banks have created vast amounts of money to prop up businesses and individuals, so there is lots of money chasing goods and services,” he said. Oil prices are rebounding too as people travel again, while supply-chain bottlenecks are creating shortages, further driving up prices.
Meanwhile the UK housing market is going through the roof, up 10.2% in the year to March, latest official figures show. The average house now costs £256,000 – up £24,000 in a year.
In Yorkshire and Humber, growth topped an incredible 14%.
While incomes have been stagnant for years, this could all pile more pressure on the nation’s wallets.
SAVER PAIN
Inflation will inflict maximum pain on savers, with the average easy access account paying just 0.06%.
You can get more by shopping around, but even Atom Bank’s best buy Instant Saver account pays a mere 0.5%. Fixed-rate bonds also pay less than inflation. Cynergy Bank pays 1.02% a year for three years and Hodge Bank offers 1.35% over five years, which means they fail to protect your money in real terms.
Savings rates are unlikely to improve as the Bank of England has signalled its reluctance to hike base rates and slow growth.
Those able to take a bit more risk should consider investing in the stock market. InvestEngine founder Simon Crookall said: “If you had put £10,000 in the average bank account 10 years ago you would have just £10,442 today, whereas a globally diversified portfolio of shares would give you £29,173.”
Global equities have performed strongly in the past decade, but it could change if inflation beds in.
INVESTMENTS
Jason Hollands, managing director at Tilney Investment Management Services, said cash cannot beat inflation and government bonds are little better, with 10-year UK gilts yielding just 0.86%.
This is up from just 0.2% at the start of the year but Jason added: “This is still negative in real terms.”
Stocks and shares are better, as the UK market now yields 2.88% from dividends. “This could rise as profits recover,” he said.
Ed Monk, associate director for personal investing at Fidelity International, warns that rising inflation suggests the economy is building up steam but stock markets could be in for a bumpy ride.
He explained: “Investors should be well diversified, have safety nets in place and avoid knee-jerk reactions to any big market moves.”
However, Darius McDermott, FundCalibre’s managing director, suggests that one way to protect your wealth from an extended bout of inflation would be to buy an investment fund that targets firms that perform well when prices are rising.
“In the UK, this would include JOHCM UK Dynamic and Jupiter UK Special Situations,” he said. “Globally, Schroder Global Recovery and Ninety One Global Special Situations are worth a look.”
If inflation does increase volatility, Darius suggests combating this by investing monthly, rather than paying in lump sums. “This could help you get through the summer with fewer sleepless nights.”
Jason Cozens, founder of gold app Glint, said as inflation spikes
Ed Monk, Fidelity International the gold price has jumped 10% in just six weeks.
He added: “Although its value can decline, gold has been a store of value for centuries.”
MORTGAGES
Today’s house price surge has been driven by the stamp duty holiday, pent-up demand after lockdown, property shortages and record low mortgage rates.
House buyers need to be careful in today’s overheated market, said Hargreaves Lansdown’s personal finance analyst Sarah Coles.
“It is far too easy to be sucked into paying thousands more than you planned.
“If you can afford it, that’s fine. Otherwise take a step back.”
Jamie Durham, economist at PwC, said if inflation takes hold it may force up mortgage rates: “This could ultimately hit house price growth.”
Scottish Friendly savings specialist Kevin Brown said: “Now may be a good time for homeowners to lock into today’s low, fixed-rate mortgage deals.”
Habito offers fixes running up to 40 years – the longest term ever.
The inflation threat may of course prove to be short-lived and could quickly blow over. Let’s hope so.
Investors should be well diversified, have safety nets and avoid knee-jerk reactions to big market moves