The Daily Telegraph - Saturday - Money
Inflation returns: how to fight back
Post-pandemic price rises will shake up the rule book for investing, savings and pensions, says Sam Benstead
We are about to enter a period of higher inflation as pentup demand is unleashed after 15 months of restrictions, economists have warned.
What has been obvious on investment trading screens since the start of the year, as commodity prices rose and bond prices fell, will soon start to affect consumers when they go to the shops, pay their energy bills and plan their retirement, experts fear.
Inflation figures released this week showed the annual rate of price increases more than doubled between March and April as the Consumer Price Index rose from 0.7pc to 1.5pc. A jump in energy costs was the main contributor thanks to a rise in the price of oil.
While the CPI has remained below the Bank of England’s 2pc target, economists said the increase marked the beginning of a period of rising prices.
Threadneedle Street’s latest forecast is that inflation could peak at 2.5pc by the end of the year. Barclays predicted that it would reach 2.3pc at the start of next year, and Axa Investment Managers said it would be 3pc by the end of 2021. However, other research suggested a sustained period of higher prices. The consultancy Liverpool Macro Research, for example, forecast that inflation would be as high as 5pc throughout next year.
Shamik Dhar of BNY Mellon Investment Management said the impact on investment portfolios would be determined by how central banks reacted.
“If they decide to let the economy run hot, in the belief the inflationary surge is temporary, economies could 2018 2019 overheat and the raising of interest rates, when it does comes, will be larger and faster than it otherwise might have been,” he said.
In this scenario, which Mr Dhar said had a 30pc probability, stocks would initially perform well but then fall sharply when central banks raised rates. If ratesetters decided to raise them much sooner, stocks would tumble, he added.
While stock market indices are at the mercy of central banks, investors can take measures to protect their portfolio. One way, according to Dzmitry Lipski of Interactive Investor, the stockbroker, is to buy index-linked bonds, which pay interest that rises in line with inflation.
He said another option was to invest in oil and mining companies as their profits increased in line with the price of raw materials. Gold should also per2020 form well, he added, as it tended to rise in value when inflation erodes the buying power of traditional currencies.
Retirement incomes are also vulnerable to rising inflation. Those with a fixed-rate annuity could have their income eroded every year and arguably stand to suffer the most from a sharp rise in inflation. Now could be a good time to lock in the rates on inflationlinked annuities as their cost will rise – and rates fall – in tandem with inflation.
Nathan Long of Hargreaves Lansdown, the stockbroker, said that, paradoxically, pension savers could address the danger by buying more stocks and taking more risk in their portfolios. Savers would have to hold on to them for three to five years to benefit.
However, high inflation could be a boon for tens of millions of pensioners as the state pension could get a big boost.
Savers who prefer cash accounts do not have the same breadth of options to fight the corrosive effect of inflation. There are currently no widely available easy-access or fixed-rates savings deals that beat inflation, so savers would see their wealth shrink in real terms. The closest is a deal from Gatehouse Bank that offers 1.4pc interest, but savers would need to lock their money away for five years to qualify.
Some cash Junior Isas still beat inflation. The best deal is from Bath Building Society and offers 2.5pc. Most of the best Junior Isa deals are from smaller building societies and may not be available to everyone.