How to protect your savings from the surge in inflation
From supermarket shares and drinks firms to index-linked bonds, we’ll help stop your wealth evaporating
RISING prices may have forced you to clamp down on your spending, but it could also be a trigger for a rethink on how you save and invest. Over the past few months, inflation has consistently topped the Government target of 2 per cent, with the Bank of England forecasting that it could hit 4 per cent by the end of the year as the economy recovers from the pandemic.
In August, as confirmed last week, consumer prices rose by 3.2 per cent. Although the Bank’s Monetary Policy Committee expects it to be a temporary hike, with the rate forecast to be brought back under the target level by the second half of 2023, higher inflation can be painful for your finances.
‘Over time, inflation is the greatest risk to your capital,’ says Ben Kumar, senior investment strategist at investment house 7IM. ‘You should always be worried about inflation.’
In today’s low interest rate environment, beating inflation with a savings account is an impossible mission. Figures from rate scrutineer Savings Champion show that the best interest rate from an easy access savings account is currently 0.65 per cent – from Tandem Bank.
Locking up your money for a while shifts the dial a little in savers’ favour, but it still won’t come close to 3.2 per cent. Opt for a one-year fixed-rate savings bond and the best rate on offer is from Atom Bank at 1.5 per cent.
If you’re happy tying up your savings for five years, Atom will pay a higher rate of 1.86 per cent.
It may feel painful holding money in a savings account that is being eroded by inflation. But it’s without doubt a prudent way to ensure you have money available in case of a financial emergency.
To minimise the impact of inflation, Jason Hollands, a director of wealth manager Tilney Smith & Williamson, recommends adjusting your savings strategy.
He says: ‘In a period of high inflation but ultra-low interest rates, you don’t want to hold more cash than is necessary for long periods of time. To beat inflation as an investor, you need to consider riskier assets such as equities.’
BONDS offered by companies and the Government provide the potential for higher income. But the set interest payments available from fixed-rate income bonds mean their value will be eroded by inflation.
Laith Khalaf, head of investment analysis at wealth manager AJ Bell, says index-linked bonds – offered by the Government and known as gilts – are worth considering. On these, interest payments increase in line with inflation, providing some protection.
He urges caution though, saying: ‘Given the risk of inflation, demand for index-linked bonds is high, so they’re trading at premium prices.
‘There are also concerns that after 12 years of bond prices soaring, thanks to a continued programme of quantitative easing by the Bank of England, this bubble could burst when the monetary measure comes to an end.’
STOCK MARKET CAN HELP BEAT INFLATION
THOSE keen to beat inflation, and happy to take on board investment risk, should consider the stock market. Returns over the past year have been inflation-beating, with the FTSE100 and FTSE All-Share indices generating returns of 15 and 19 per cent respectively. More specifically, when consumer prices are edging higher, it can pay to invest in companies that are able to benefit from an inflationary environment.
Kumar says: ‘Successful companies have pricing power and can increase their prices without adversely affecting demand. Investing in these businesses means that as they put their prices up, you make money, too.’
Add to this the fact that many companies are now recovering from the tough times they experienced during the pandemic, and the prospects for beating inflation from a portfolio of equities look positive.
For example, the FTSE100 Index offers investors an income in the region of 3.5 per cent a year. With the potential for additional capital return on the back of rising share prices, there is the potential for investors to conquer inflation.
Some businesses are more inflation-proofed than others. Financial stocks – banks in particular – and mining companies often perform well during periods of higher inflation. But Rob Burgeman, senior investment manager at wealth manager Brewin Dolphin, says it’s also worth seeking out companies that have built such strong brands that people keep buying, whatever the price.
He adds: ‘ Consumer staple companies such as drinks giant Diageo and Unilever – owner of brands such as Dove, Surf and Vaseline – tend to hold their value during periods of inflation because they’re able to pass price rises on to consumers without impacting sales.
‘A household might cut back on some purchases, but they’re less likely to switch their favourite washing powder or swap their favourite tipple for a cheaper, own-brand version.’
Supermarkets also tend to perform well when inflation is on the rise. Like consumer brands, they can pass on higher prices to shoppers.
Another sector that can help investors ride out inflation is infrastructure. Demand for new roads, power supplies and telecommunications networks rarely dips.
Furthermore, companies operating in this sector often benefit from long-term contracts that have inflation protection built into them.
Among the investments Hollands recommends in this sector are The Renewables Infrastructure Group, HICL Infrastructure and Lazard Global Listed Infrastructure Equity Fund.
Both Renewables Infrastructure and HICL offer investors an attractive annual income equivalent to around 5.3 per cent and 4.8 per cent respectively – the Lazard fund less so at around 2 per cent. But their share prices do look inflated.
While useful to factor in broad economic trends when investing, Kumar says that when it comes to beating inflation, the real key for investors is staying invested in the stock market.
He says: ‘Having a well-diversified portfolio that you are comfortable leaving invested is the best strategy, irrespective of what happens to inflation.’