How does rising inflation impact your investment outlook?

How does rising inflation impact your investment outlook?

Alistair Crook

Private Client Adviser

With UK inflation hitting a 40 year high at 9%, the way you think about investment returns may need to change, particularly in the short-term.

A different inflationary environment
From January 2000 to the start of this year, inflation, as measured by the Consumer Price Index (CPI), averaged 2.3%. Over that period, it had briefly risen above 5% three times – in 2008, 2011 and, most recently in late 2021. The last time CPI inflation was above 7% was in March 1992, over 30 years ago.

The rise in inflation so far this year has been broadly due to the large increases in oil and gas prices that have pushed up petrol prices and utility bills, rising food prices as well as higher prices for goods bought from abroad. In its May Monetary Policy Report, the Bank of England (BoE) said inflation in Britain would peak later than other big advanced economies due to the expected significant increase in the cap on household energy tariffs in October.

The BoE now expects inflation to peak at above 10% in the fourth quarter of this year, compared with its previous projection of around 8% in April. Despite the higher peak, the BoE expects inflation to fall to 1.3% in three years’ time, which would be the biggest undershoot of the 2% target since the 2008-09 global financial crisis.

The cost of living crisis
With inflation at today’s high rate, the ‘cost of living’ crisis is placing household budgets under increasing strain. Some immediate tips are to check that your tax code is correct, so that you are not overpaying tax and also to check all the regular payments, standing orders and direct debits, that you pay from your bank account and whether all these services are essential.

Inflation is now an even more important consideration for short term financial planning and also the longer term. Investors are generally looking for ‘real’ returns. These are calculated by deducting the inflation rate from the investment rate of return (the nominal return). For example, if an investment return is 8% and inflation is 2%, the real return is +6% (8% – 2%), but in the current environment when inflation is 9%, the real rate of return can easily become negative which means that your investment’s buying power is shrinking.

Taking the right steps
We generally recommend that you hold investments for the medium to long-term, which we would view as being for five years or more. You should consider your own investment goals and timeframes before making any investment decisions. Over the coming months and years, investment returns may struggle to keep pace with inflation which may place pressure on short-term investment valuations, especially if you are taking income from your portfolio.

However, in times of higher inflation, aiming to achieve real returns or minimizing the impact of inflation, becomes of growing importance. A good current example is the savings market, where the top rates have risen in response to the Bank of England’s recent base rate increases. You can now earn over 1% on an instant access account – the best nominal rate for several years, but the worst real rate for many years because of inflation at its current high level.

Look before you leap
There are many investment options available. Our advisers can assess your financial needs and attitude to risk and then provide investment recommendations which may be able to help you to provide real returns over the longer term. However, we will guide you and it is important that you also have sufficient cash funds available to meet any emergencies.

Ask your Origen adviser or contact us to find out how your investments can meet the challenge of rising inflation, so that they can grow in real terms and provide the income that you may need in the shorter or longer term. 

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

CA8295 Exp:06/2023

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