Inflation on the rise: should you be worried?
Jul 13, 2021
Headlines about increasing UK inflation may ring alarm bells for some investors, but there’s no reason to panic if your portfolio is in good hands.
What’s up with UK inflation?
This May, UK inflation hit its highest level in two years when it reached 2.1% – quite the hike from the 0.4% it was at just three months before. The Bank of England (BoE) expects it to get to 3% later this year… or 4% depending on who you ask.
Is this such a bad thing? Even the BoE can’t agree on how we should feel about it. After their outgoing chief economist warned that “everybody would lose” from higher inflation, the bank’s governor, Andrew Bailey, insisted this was an over-reaction and that such levels would only be temporary.
It’s important to remember that the government’s ideal target – the ‘Goldilocks zone’ where the economy is just at the right temperature – is 2%. This is where we were pre-pandemic, and roughly where we are at the time of writing. So we’re not quite at the stage of burning banknotes to keep warm (see 1920s Germany) or carrying a one-million-pound note (see present-day Venezuela) or other such terrible tales of hyperinflation.
What happens with higher inflation?
We all know that at the most basic level, higher inflation means that goods and services will cost more than before. You’ll need to stretch your income further to get the same basket of goods.
Of course, these aren’t normal times. With the whole of the UK essentially being in stasis for the thick end of the last two years, we haven’t been able to spend like we used to. Now things are opening up again, there’s a bounce back as people start putting those accumulated savings to use. Where supply is struggling to meet demand, we’re seeing spikes in certain areas. A striking example of this is the 17.9% jump in petrol and diesel prices over the past year, although this has been offset by cheaper food and drink.
A common government response to creeping inflation is to raise interest rates. As we’re only at 0.1% now, this is hardly going to rattle the windows. And it could spell good news for savers. But for now, given that the BoE views the increase as a transitory event in response to a (welcome) burst of growth, it’s looking to see what happens before it takes any action.
What does this mean for your investments?
Certain assets can do well in an inflation boom. Tangible assets like real estate and commodities such as gold and oil often benefit from prices going up. Meanwhile, cash and some fixed-income investments can lose value as interest rates fail to keep up with inflation.
But you should never base your investment portfolio on the conditions of the day, nor tweak it in response to the latest headline. Having a kneejerk reaction to what’s going on around you as an investor is akin to a dog chasing its tail.
As with any market challenge, diversification, patience, and a long-term approach are crucial for investment success. You can’t expect inflation to sit still, so you need to build contingency for movement within your strategy. That’s why our portfolios include the option for index-linked bonds that are there to absorb inflationary shocks.
At Goodmans, we’re steady as she goes. We champion an all-weather, consistent and long-term investment approach matched to each client’s specific situation, outlook and goals.
So when clients ask us whether it’s time to worry about inflation, we tell them we have their backs. Don’t expect us to be reactionary but do expect us to keep your money as safe as possible, whatever the weather.