Talib Sheikh, Head of Strategy, Multi-Asset, explains why high levels of inflation is bad for investors, and what they can do to protect the purchasing power of their money.


UK inflation is at historic highs, with the Bank of England expecting it to increase further this Spring. The latest figures show that prices increased by 5.4% from December 2020 to December 2021 – the largest rises for 30 years or more. This is exacerbated by historically low interest rates, meaning that the environment for savers is even worse. Back in the 80s and 90s, savings rates were usually higher than inflation: cash savers made money in real terms. Today, with rates hovering just above zero, savers lose pretty much the whole inflation rate. You have to go back nearly 50 years to see anything like it. Even “go-to” lower risk investments such as investment grade credit and government bonds are eroding the real spending power of investors at current levels.


The big question is, how long will this last? Much has been made of ‘transitory’, short term bottlenecks associated with re-opening. Inflation looks high because of base effects, as this time last year we were in a post-pandemic period of very low inflation. It started to rise in spring 2021, so from spring this year the numbers will start to look less alarming.


However, UK inflation is likely to remain structurally higher than the post GFC period. The pandemic appears to have had long term effects on employment, bringing forward retirement and lifestyle changes on top of the loss of EU nationals post-Brexit leading to stickier wages. The Brexit transition will create frictional costs for UK companies for the foreseeable future. Furthermore, fiscal spending is likely to remain high: the austerity of the post-2008 crisis period is out of fashion.


These reasons help explain why the market expectation of UK ten-year inflation is a whopping 4%. What about the other side of the equation, savings rates? UK ten-year interest rates have moved up but are still just 1.5%. Andrew Bailey talks about increasing rates to deal with inflation, but he can only go so far. UK households failed to reduce debt levels over the last ten years, meaning that the housing market remains a huge part of the UK economy. As a result, the UK just can’t tolerate materially higher interest rates.


Therefore, the problem of cash savings and low risk investments being eroded by inflation isn’t going away. At 4% inflation, a cash investment of £100,000 earning 1% interest (which already assumes another two rate hikes by the Bank of England) loses a quarter of its real value in just ten years.


One way in which consumers can protect themselves against inflation is by investing. While traditional assets like high quality credit yield very little, equities, high yield debt, emerging markets, and alternatives can offer much more attractive returns but expose investors to higher levels of risk.


UK investors who fail to act risk allowing their rainy-day funds, nest eggs and holiday money to be eroded by inflation at the fastest rate in history. However, there are other solutions for investors that offer some protection from inflation. Investing in a multi-asset fund provides flexibility and gives investors a broader toolkit when looking to achieve the best possible returns. This is achieved through investing in higher-yielding, higher-risk asset classes while controlling risk using diversification and active management. Therefore, while the threat of inflation has never been greater, it is still possible to grow and preserve capital in real terms, but requires a different approach to what has worked in the past. 

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