What can investors do if inflation is around the corner?

It seems evident that Central Banks will prioritise full economic recovery over controlling inflation. That’s bad news for cash savers.

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  1. Rob Morgan

Investors have had little need to worry about high inflation over the past decade. Sure, prices of goods and services have been going up, but it’s been relatively slow and steady. Yet could things be about to get trickier?

Ronald Reagan once described inflation as being “as violent as a mugger, as frightening as an armed robber and as deadly as a hit-man”. Even at a relatively low rate of 2.5%, a basket of goods and services that cost £100 ten years ago would cost £128 today. For cash savers inflation can be a notorious bogeyman – and it could be that events conspire to create quite a bit of it within the next few years.

Inflation or disinflation?

The current collapse in economic activity we are seeing means that, in the short term at least, we are likely to see lower inflation. An absence of demand in many areas, reflecting the shutdown of supply and loss of jobs and incomes may trigger price cuts as efforts are made to tempt wary consumers back. While there will be areas that experience strong demand, this ‘scarring’ effect, combined with large falls in oil and other commodities, means we look set for some months of disinflation – where the rate of inflation falls. If this effect is extreme, we could even see temporary deflation where, overall, prices fall.

Further out, though, there is reason to believe that inflation might rise, possibly substantially, especially if recovery from the current downturn is vigorous. Here’s why.

To stave off economic crisis during the pandemic the world’s Central Banks, led by the US Federal Reserve and the European Central Bank, have created vast amounts of money. Rather than being used to plug a hole in bank balance sheets (as similar measures did in the 2007/08 financial crisis), this money is aimed at propping up businesses and individuals while the worst of the pandemic passes. It is therefore making its way to governments, and much of it into the pockets of ordinary citizens, and is more likely to result in too much money chasing too few goods – a recipe for inflation.

Price pressures could build in certain areas if the current recession removes capacity as businesses go bust, plus survivors may not be able to operate as efficiently if social distancing must continue or if there are supply chain issues. A few sectors may have no choice but to move to higher priced services, for instance restaurants with only half the tables and more space may need to charge more and planes with fewer passengers may have to raise ticket prices. Combined with ‘revenge spending’ – pent up demand for things returning rapidly after an enforced hiatus – and we could see a burst of inflation.

Another important, but longer term, trend could also add to inflation: deglobalisation. China has long been the main manufacturer to the globe, providing cheap consumer goods through its low labour costs. Protectionism and the greater attention paid to securing robust supply chains could partially reverse this and contribute to rising prices for goods. There is also the possibility that commodities, notably oil and industrial metals, continue to rebound as economic recovery takes hold and governments step up infrastructure spending. With prices having languished for some time, and investment in production having been curtailed, it’s possible some commodities could experience tight supply and thus higher prices that then feed into consumer goods and services.

How to combat inflation in your portfolio

It’s not nailed on that inflation makes an unwelcome return. A lot of people predicted high inflation would follow the global financial crisis over a decade ago owing to the largescale money creation through quantitative easing that occurred. It didn’t transpire. Yet we believe investors should be aware of the risks, and this time around the chances of high inflation resulting would seem to be greater. It also seems evident that Central Banks will prioritise full economic recovery over controlling inflation.

That’s bad news for cash savers. Unless interest rates rise significantly, a jump in inflation is likely to put a significant dent in the spending power of cash in the bank or building society. The good news is a well-diversified investment portfolio can help preserve and grow a nest egg amidst the ravages of inflation. Here is a look at some components you could consider.


Holding shares, also known as equities, is the most popular way to grow wealth ahead of inflation. Company earnings and profits often increase at a faster rate than prices of goods. However, high levels of inflation tend to be something of a double- edged sword. If a company cannot pass increased costs onto customers, then it can result in a fall in sales and profits. Firms with ‘pricing power’, whose products and services are in strong demand, can put up their prices to reflect higher costs, and should, in theory, be well placed to cope, though.

Inflation partly caused by increasing commodity prices can be countered in a portfolio via some exposure to the mining and energy sectors. Funds with a decent allocation, or perhaps even specialist ones dedicated to these areas, can help diversify a portfolio.

Inflation-linked bonds

Unlike conventional bonds, index or inflation linked bonds provide an income that rises. They tend to offer some protection from an increase in inflation expectations, though they can become expensive when lots of investors are looking to protect themselves from this risk and drive up prices.

Some multi asset funds and investment trusts hold a significant amount in inflation-linked government bonds, often UK gilts and US treasuries, for their diversification benefits, one being Personal Assets run by Troy’s Sebastian Lyon. Alternatively, there are specialist funds that target this niche asset class such as exchange traded fund Xtrackers II Global Inflation-Linked Bond UCITS ETF.

Property and infrastructure

Property funds such as unit trusts or investment trusts primarily invest in commercial property such as shopping centres, warehouses, offices and industrial units. How these markets move is different but the objective for the investor is the same: obtain an attractive and hopefully rising rental income and some capital growth over the long term – thereby outpacing inflation.

Performance has been poor in recent years, particularly among retail properties as increased internet shopping put has pressure on high street. In addition, there has been a wildly volatile few months with the outlook thrown into disarray thanks to the government response to the coronavirus outbreak. Many direct property investment trusts have cut or cancelled dividends, and the pace and scope of the lockdown lifting will affect how quickly and to what extent rental income recovers. Some areas are therefore unlikely to make a good inflation hedge due to the structural challenges. However, other areas such as warehouses, logistics, data centres and healthcare property could be more resilient, albeit valuations among investment trusts operating in these areas are more expensive.

Meanwhile, infrastructure assets often have a certain amount of contractual inflation protection built in. They can potentially provide investors with an attractive, income-orientated return and welcome diversification from equity markets. There are a number of options for investing in this specialist area, which looks relatively well placed to generate consistent returns.


For much of human history gold has been used as a means of exchange. Today, it fulfils a special role, though it tends to divide investor opinion. Gold often becomes the go-to asset in times of crisis, or when fears persist that interest rates on paper money aren’t enough to compensate for inflation. It offers also some diversification and tends to maintain its spending power over long periods of time. However, it produces no income and tends to be volatile.

It is possible to buy exposure to gold via an exchange traded fund (ETF). We tend to prefer ‘physically-backed’ funds which own gold kept securely in a vault, as opposed to derivatives-based funds where there is added risk and complexity. One example is iShares Physical Gold.

Another route into gold is through shares in gold mining companies. These tend to represent a ‘geared’ play on the gold price, meaning that they multiply the effect of a rise – but also multiply any fall. This is because profits can be highly sensitive to what the gold price is doing, and the riskier firms could even swing from profit to loss or vice versa on bullion’s moves. The fund on our Foundation Fundlist dedicated to this area is Blackrock Gold & General, but given the high level of risk involved we would suggest it is only held as a small proportion (e.g. less than 5%) of a diversified portfolio.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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