The Office for National Statistics (ONS) has revealed the UK’s inflation rate is now at 5.5%. This means prices of everyday goods and services are rising at their fastest pace in 30 years.
So, if you’re an investor, then what can you do to protect your money from inflation? Let’s take a look.
What has the ONS revealed about inflation?
The ONS, the government’s independent statistics provider, updated its Consumer Price Index (CPI) on Wednesday 16 February.
According to the CPI, prices rose by an average of 5.5% in the 12 months to January. This is 0.1% higher than December’s figure. What this means is that the UK hasn’t seen an inflation rate as high as this since March 1992, when the CPI stood at a whopping 7.1%.
It’s important to note that the CPI is just one measure the ONS uses to calculate price rises. The Retail Price Index (RPI), another measure of inflation, hit 7.8% in January. One difference between these measures of inflation is that the RPI includes rises in housing costs whereas the CPI does not.
While the RPI is a less popular way of calculating inflation, it’s important as it determines student loans interest rates. The RPI is also pegged to roughly 25% of the UK government’s debt. According to the Institute for Fiscal Studies, the UK’s current inflation rate will add £23 billion to the cost of servicing the national debt over the next two years.
What does rising inflation mean for investors?
Rising inflation is typically bad for investors holding stocks and shares. That’s because rising inflation can lead to higher interest rates, which make it more expensive for businesses to borrow capital. This can have an impact on future investment and limit company growth.
Higher input costs for businesses as a result of rising inflation can also have an impact on company profits, potentially causing share prices to fall.
It’s also worth taking into account that while many businesses will hike prices in line with inflation, consumers may not be willing, or able, to pay higher prices for goods and services. This again can negatively impact share prices.
If you hold bonds, then you are also likely to see the value of your investment fall during periods of high inflation. That’s because as inflation rises, bond returns generally fall while yields generally increase in order to attract new buyers.
How can investors protect their money?
If you’re invested in the stock market, then it’s worth knowing value stocks often outperform growth stocks during periods of high inflation. However, there are no guarantees that any investment will outperform inflation. As with any investing, remember that the value of your investment can fall as well as rise.
While some investors – especially those with a long-term investing horizon – may choose to ride out the current inflation issue, others will take a different approach. Let’s take a look at three different strategies taken by investors in the current environment.
Strategy 1: invest in commodities
Commodities refer to real assets, such as gold, silver, oil and gas. In the past, holding these types of assets was a decent hedge against inflation due to the fact that many commodities are difficult to obtain or have a limited supply. As a result, the theory is that these assets will hold their value better than others during periods of high inflation.
If you want to invest in commodities, then you don’t have to buy the physical product itself. For example, an Exchange Traded Commodity (ETC) allows you to track the performance of a particular commodity and benefit if its price rises – without the hassle of insuring or storing the physical commodity.
ETCs can be purchased through a share dealing platform such as Hargreaves Lansdown, and they can even be held within a stocks and shares ISA. Examples of ETCs include WisdomTree Physical Gold (GBP) and WisdomTree WTI Crude Oil.
Strategy 2: buy property
House prices are soaring, with average prices up roughly £25,000 in the space of a year. As the supply of housing is likely to remain low, some investors will choose to invest in bricks and mortar.
If you wish to explore this route to protect yourself from inflation, then be sure to factor in the possibility of a future house price crash!
Strategy 3: hold cash
Many investors will warn against holding cash during periods of high inflation. Yet, if a stock or housing market crash happens, those holding cash may be the least impacted.
If you choose this strategy, while you can’t hope to earn anything close to the current inflation rate, it’s still worth getting the highest possible savings rate. Right now, that’s 0.71% AER variable in an easy access account, or up to 2.2% AER in a fixed account. For more options, see our list of top-rated savings accounts.
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About the author
Karl is a writer specialising in investing and personal finance content. He regularly contributes articles on savings, bank accounts, mortgages, and loans. He was previously a Personal Finance Writer for MoneySavingExpert.
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