Higher prices may have forced us to curb spending, but it can also trigger rethinking ways to save and invest. Over the past few months, inflation has consistently exceeded the government’s target of 2%, and the Bank of England predicts that it could reach 4% by the end of the year as the economy recovers from the pandemic.
As confirmed last week, consumer prices rose 3.2% in August. The Monetary Policy Committee of the World Bank expects a temporary hike, but interest rates are projected to fall below target levels by the second half of 2023, but rising inflation could hurt public finances. I have.
“Inflation is the biggest risk to your capital over time,” says Ben Kumar, senior investment strategist at Investor 7IM. “You always have to worry about inflation.”
Shopping: Inflation has consistently exceeded the government’s target of 2% over the past few months.
In today’s low interest rate environment, it is an impossible mission to beat inflation with savings accounts. Rate Investigator Savings Champion figures show that the highest interest rate from an easily accessible savings account is currently 0.65% – from Tandem Bank.
Locking your money for a while shifts the dial a bit in favor of the saver, but it still doesn’t approach 3.2 percent. If you choose a one-year fixed rate savings bond, the highest interest rate offered is from the 1.5% Atom Bank.
If you are happy to tie up your savings for 5 years, Atom will pay a higher rate of 1.86 percent.
Putting money into a savings account that is being eroded by inflation can be painful. But it’s definitely a wise way to make money available in the event of an economic emergency.
To minimize the effects of inflation, Jason Hollands, director of wealth manager Tilney Smith & Williamson, recommends adjusting the savings strategy.
He states: “We don’t want to hold more cash than we need for a long time during periods of high inflation and ultra-low interest rates. As an investor, we need to consider more risky assets such as stocks to overcome inflation.
Bonds offered by businesses and governments offer higher income potential. However, the set interest payments available from fixed rate income bonds mean that their value is undermined by inflation.
Inflation-indexed bonds, known as gilts, provided by the government, are worth considering, said Reiskalav, head of investment analysis at Wealth Manager AJ Bell. For these, inflation will increase interest payments and provide some protection.
But he cautioned, saying: ‘Given the risk of inflation, the demand for inflation-indexed bonds is high, so they are traded at premium prices.
“There is also concern that this bubble could burst when monetary policy ends after a 12-year rise in bond prices, thanks to the Bank of England’s ongoing program of quantitative easing.”
Stock markets can help hit inflation
Those who are keen to overcome inflation and are willing to take on investment risk should consider the stock market. Returns over the past year have outpaced inflation, with the FTSE 100 Index and FTSE All-Share Index generating 15% and 19% returns, respectively. More specifically, when consumer prices are rising, you can pay to invest in a company that can benefit from an inflationary environment.
Kumar said: ‘Successful companies have pricing power and can raise prices without negatively impacting demand. Investing in these businesses means that when they raise prices, you also make money.
In addition to this, many companies are recovering from the difficult times they experienced during the pandemic, and the prospect of defeating inflation from their equity portfolios looks positive.
For example, the FTSE 100 Index provides investors with an annual income of 3.5%. Investors may overcome inflation as additional capital gains may be expected against the backdrop of rising stock prices.
Some companies have stronger inflation protection than others. Financial stocks, especially banks and mining companies, often perform well during periods of high inflation. But Rob Bargeman, senior investment manager at Wealth Manager Brewin Dolphin, says it’s also worth looking for a company that is building a strong brand that people will continue to buy, regardless of price.
He adds: ..
“Households may reduce some purchases, but they are less likely to replace their favorite detergent powder or their favorite nipples with a cheaper, own-branded version.”
Supermarkets also tend to perform well when inflation is rising. Like consumer brands, they can pass high prices to shoppers.
Infrastructure is another sector that can help investors survive inflation. Demand for new roads, power supplies and telecommunications networks rarely declines.
In addition, companies operating in this sector often benefit from long-term contracts that incorporate inflation protection.
Hollands recommends investments in this sector include The Renewables Infrastructure Group, HICL Infrastructure and Lazard Global Listed Infrastructure Equity Fund.
Both Renewables Infrastructure and HICL provide investors with attractive annual salaries, equivalent to approximately 5.3% and 4.8%, respectively. The Lazard fund is less than that, about 2%. However, their stock prices appear to be skyrocketing.
While it helps to take into account a wide range of economic trends when investing, Kumar says the real key for investors when it comes to breaking inflation is to continue investing in the stock market.
He states: “It’s best to have a well-diversified portfolio that doesn’t hurt to leave the investment, no matter what inflation happens.”
Don’t let the tax collector take it!
Shifting up the risk spectrum and restructuring the investment portfolio can help mitigate the impact of inflation on assets, but it’s also worth making sure that tax collectors aren’t taking more than they need to be. there is.
Reiscaraf, Head of Investment Analysis at Wealth Manager AJ Bell, said:
The best way is to invest in Isa and pensions. Save up to £ 20,000 on Isa this year and all returns and withdrawals are tax exempt. With contributions backed by tax relief, you can pension up to £ 40,000 per tax year. Taxes are only paid if you access the pension fund to provide regular or irregular income.
There is also a dividend allowance, which means that £ 2,000 of dividend income for the current tax year is tax exempt. Income exceeding this amount is taxable. The tax rate will be raised in April next year, and some funds will be provided for the government to restart the National Health Service.
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Protect your savings from a surge in inflation
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