‘A kind of hidden tax’ – how to ‘minimise exposure’ as UK inflation rate surges

Inflation: Expert discusses Consumer Price Index rise of 2.1%

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The latest figures, released on Wednesday, revealed the rate of inflation has surpassed the Bank of England’s target of two percent. It comes as investors have been watching the rising rate of inflation closely for several months now.

The news was further bad news for savers, amid a low interest rate environment and the rate of inflation more than doubling in April 2021 – when it increased by 0.7 percent to 1.5 percent.

But what does the rate of inflation mean for other aspects of personal finance – such as investments?

The impact of rising prices upon households’ investments is something Tom Stevenson, investment director for Personal Investing at Fidelity International, has explored this week.

He has also suggested a number of steps people can take to protect their personal finances.

“How can you protect your portfolio from the ravages of inflation? Rising prices are a kind of hidden tax,” Mr Stevenson said.

“And, as with any tax, there are things you can do to minimise your exposure.

“Some assets are more vulnerable to inflation than others.

“Principally, anything which pays a fixed income and/or offers a fixed capital return.

“Bonds are the obvious case in point here.

“Bonds, which pay a fixed income (or coupon as it is sometimes called), become less valuable to an investor as interest rates rise.

“That is reflected in a rising yield and a falling price. Bond investors hate inflation.”

So, what about the impact of inflation on shares?

“Shares are traditionally a much better home for your money in a modestly inflationary environment,” he said.

“That’s particularly true if, as now, inflation is the consequence of rising demand rather than a supply shock such as the oil price hikes in the 1970s.

“Companies can pay a higher dividend if their profits rise which provides some protection to investors.

“They can also raise their prices if demand allows, securing the profits out of which they pay their dividend.

“Only when inflation rises to historically high levels can it also cause a problem for investors in shares.”

Mr Stevenson suggested there are various forms of action to take.

“Review your portfolio to make sure it’s well-diversified across a range of assets.

“As well as bonds and shares, a well-diversified portfolio will hold other assets, some of which also have a good track record of hedging against moderate levels of inflation.

“These include infrastructure (where income streams can sometimes have an explicit inflation link), real estate (where rents can rise in a strong economy) and commodities, including gold.”

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