A 1970’s comeback?
Not everyone will remember the 1970’s. Questionable fashion aside, is persistent higher inflation going to make an unwelcome comeback in the UK?
Proposed changes to government fiscal policy along with an easing of austerity, the country experiencing record employment levels and the fall in Sterling could well provide the backdrop to persistent higher longer term inflation. Maybe not next year or the year after, but over the longer term I would not be surprised if inflationary pressures build. Indeed, exposure to inflation is very different for particular sections of society e.g. pensioners who may well spend proportionately more of their income on food, council tax, fuel and other utility costs and therefore could experience higher rates of inflation than the headline Consumer Price Index (CPI) would indicate.
For those who haven’t experienced higher rates of inflation (a high point was 1975 when it reached the dizzy heights of 24.20%) here is a just taste of its pernicious effect at a relatively modest 5% per annum:
The “real value” (purchasing power) of £10,000 would fall to just £6,139 over a period of 10 years. Putting it another way, just to protect the real value of £10,000 you would need to grow it to £16,288. The only way to achieve this is to invest in assets which have the potential to grow by at least inflation and hopefully more, thereby increasing the purchasing power of your invested capital.
Apart from the obvious impact on the cost of living, what does this mean for investors? It is nigh on impossible to make a real return from cash so alternative asset types are a logical consideration. Bonds (fixed interest securities)? When interests eventually rise these could well take a downturn. Shares, with markets at an all-time high? Property perhaps? Gold? What about the increasingly range of alternative investments such as infrastructure?
The US economist Milton Friedman once said “inflation is taxation without legislation”. Time to review your investment strategy?
Author: Paul Newton FPFS, CertPFS (DM & Securities), STEP Affiliate, CertPMI is a Chartered Financial Planner for Castlegate Financial Management Limited, a firm of Independent Financial Advisers, authorised and regulated by the Financial Conduct Authority. 8 Castlegate Grantham Lincolnshire. 01476 591022. This article is for information purposes only and does not constitute financial advice which should be sought before any action taken.
