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Protection against inflation

Inflation is beyond your control but that doesn’t mean you can’t take action to help preserve your investments and savings from its effects.

The COVID-19 pandemic has had a drastic effect on the global economy. Economic activity has dried up with consumers buying less and fewer companies investing.

Inflation historically and today

In the run-up to the COVID-19 pandemic, things were fairly quiet on the inflation front. Arguably, policymakers were more worried about inflation being too low, or persistently low than a return to the 1970s.

There are currently a number of factors driving down inflation. The lockdown to help combat the spread of COVID-19 saw us having to stay at home, meaning we have generally been spending less, which has led to a decline in demand across the economy. We have also been driving and travelling far less and things are far from back to normal.

The effect of lower oil prices feeding into lower production costs for a wide range of goods has also pushed down inflation.

In spite of unprecedented support measures from the UK Government to help workers and businesses, consumer confidence and job security has collapsed. Economic uncertainty coupled with the real threat of unemployment have left individuals less willing to spend and businesses less willing to invest.

Increased spending could push inflation higher

If and when there is some resumption of normality (and we are starting to see this), depending on how much pent up demand there is, and how willing consumers and businesses are to part with their savings, a rise in spending could drive inflation up.

Other inflationary pressures

In the long term, there are worries about other possible inflationary pressures. The ongoing COVID-19 situation is seeing significant disruption to trade, and companies going out of business. This could have the effect of constraining the supply of goods and competition in the global economy, contributing to higher prices at checkouts.  Prices can also rise because there is less supply of products.

Whilst it is difficult to forecast the outlook for inflation with any certainty, with the current level of uncertainty in global markets, it is still worth considering the possibility that inflation may rise to levels that have historically been more ‘normal’ and consider whether your portfolio is protected.

Protection against inflation

While investors may not be too concerned in the short term about inflation, a diversified portfolio should always include some protection against inflation. This might involve holding shares in companies that are able to raise their prices over time, or include inflation-protecting assets such as inflation-linked bonds. Rather than a response to the threat of higher inflation, exposure to inflation-protecting assets should be part of normal portfolio allocation.

Threat of inflation

If you are of the opinion that inflation will go up in the long term, it is worth considering how your savings and investments could be affected. You need your investments, and the income from them, to keep pace with inflation in order to maintain the value of your buying power.

Inflation chips away at real savings and investment returns and so poses a threat to investors. The goal of most investors is to increase their long-term purchasing power but investment returns must first keep up with the rate of inflation in order to increase real purchasing power. Inflation causes a threat to this goal.

Get in touch

Whilst you can’t control inflation, you can mitigate your risk by taking actions to help preserve your investments and savings from its effects.

For further advice, get in touch, email enquiries@cowgills.co.uk and one of the team will be in touch.

Disclaimer

The value of investments and income from them may go down. You may not get back the original amount invested.

Coronavirus
Posted by Matthew Bromley
27th July, 2020
Get in touch with Matthew Bromley