The economist Friedrich von Hayek once likened the control of inflation to the act of trying to catch a tiger by its tail: an impossible task with savage consequences for our macro and personal finances. Judging by the most recent inflation statistics, the big cat is already out of the bag. So how can we stop rapidly rising prices mauling our hard-earned wealth?
Consumer price inflation in the UK was 2.1 per cent in May, trebling since March and surpassing the Bank of England’s predictions. The U.S. equivalent, meanwhile, rose to a whopping 5 per cent last month reaching its highest level since August 2008.
Some experts agree with the central banks’ view that this all temporary. Ron Temple at Lazard Asset Management points out much of the US inflation surge is down to used cars and airfares, ‘easily explained’ by a shortage in semiconductors and an inevitable bounce back from depressed prices last year.
Others are not so sure. Andy Haldane, the BOE’s outgoing chief economist, told the Spectator recently that the ‘balance of risks’ has tilted ‘decisively’ towards higher inflation. Time will tell who is right.
The name of the game is to ensure your money grows at a higher rate than inflation.
Meanwhile, it pays to be vigilant, though not paranoid. The name of the game is to ensure your money grows at a higher rate than inflation. If only it were that easy! If we take savings accounts, not one pays an inflation-beating rate. The average easy-access account pays 0.16 per cent, compared with 0.4 per cent even a year ago.
Still, locking up your money in the bank for longer might not work either. Inflation is already thumping the best fixed rates on three and five-year accounts and should that continue, committing to these deals would be unwise.
This is not to say you should tie up all your spare cash in the stock-market. Keep your options open by holding a bit of liquid cash in an easy access account, which you can move should rates improve or grab in a crisis. The best easy access account is from little-known challenger bank Cynergy, paying 0.5 per cent.
But while interest rates remain insultingly low (with central banks allergic to raising them in the near term), you’ll need to invest the bulk of your wealth. The question is how and where?
Firstly, maximise your pension contributions, first at work and then privately, to take advantage of generous tax relief – effectively a 20 per cent, 40 per cent or 45 per cent top-up on whatever you save, depending on your earnings.
Then, use up as much of your tax-free Isa allowance (£20,000) as possible, the management of which you could outsource to a real or digital wealth manager or take on yourself via an investment platform.
A more complex situation involving big assets and inheritance liabilities certainly warrants an outside opinion. Otherwise, figure out if you’re motivated (or able) to spend time formulating the right plan for you, based not just on your feelings about the likelihood of inflation but also an objective assessment of your risk appetite and the goals you’re aiming towards.
If you’re up to the task, think twice about bonds that will struggle to deliver returns (unless they are inflation linked). The same goes for so-called ‘growth’ stocks, like Tesla, which don’t pay dividends, or indeed make any profits, but tease a spectacular future.
In an inflationary world, investors want jam today, rather than tomorrow, which is why they are turning to ‘value’ stocks, i.e., companies thought to be trading below their inherent value and overdue a re-evaluation.
UK equities continue to look comparatively cheap, considering the success of the vaccine rollout and the (perceived) resolution of Brexit. The FTSE 100 is filled with banks, mining firms and oil companies, all painfully uncool but likely to see profits pick up quickly once global trade recovers. Many still pay a solid dividend too.
Think about classic hedges like gold and commodities: industrial metals like copper could continue to outperform as the raw materials needed to build green infrastructure. Newer ‘alternative’ investments, like music royalties and housing projects, have also grown in popularity in the hunt for various sources of income. The real estate investment trust Civitas Social Housing, for example, specifically aims to provide inflation-linked income.
In all, strive for a well-diversified portfolio that can be left alone for at least five years, with a firm grip on costs (an ongoing charge figure of more than 1 per cent starts to look expensive).
And a word about mortgages. It may be worth fixing your rate for longer if you’re unlikely to pay it off within five years. Barclays is currently offering a 5-year fixed deal at 1.19 per cent, the lowest rate on the market for 12 years.
Otherwise, the best thing you can do to protect your money against inflation is to make sure your earnings outpace it. Time to ask for a pay rise, perhaps?
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