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More inflation on the way: how to protect your wealth

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The inflation rate hit a 22-month high last month and analysts predict it will rise even further over the coming months. Here's how to shield your nest egg from its eroding effects.

Inflation hit a 22-month high of 1% in September, up from 0.6% the previous month.

While the uptick was expected, it was higher than the 0.8% increase analysts had predicted.

The go-to explanation for the rise is that the effects of the weak pound are starting to be felt. Sterling has been on a downward trajectory since the results of the Brexit vote in June, plunging to a 31-month low against the dollar at the beginning of October.

However, the Office for National Statistics (ONS), which publishes inflation figures, said the increase was down to rising prices for clothing and hotels and higher fuel costs.

That’s not to say more inflation isn’t to come.

“The impact of currency changes works with a lag so further rises in consumer price inflation should be expected,” says Tom Stevenson of Fidelity International.

Some economists predict CPI could reach as much as 3% by next year, considerably overshooting the Bank of England’s 2% target.

James Yardley, senior analyst at Chelsea Financial Services, says: “Investors shouldn’t underestimate how big an impact such huge currency movements can have on inflation. Back in 2008, the last time sterling depreciated significantly, the Bank of England was happy to let inflation overshoot its target until the currency shock had worked its way out of the numbers. I expect the Bank of England to do the same today.”

More inflation would be bad news for savers as it would erode the value of their money in real terms.

However, it could also spell trouble for some investors.

Here, Yardley explains what you can do to stop inflation eating away at your investment nest egg.

Inflation-proofing your portfolio

Cash is probably the worst asset class in inflationary periods.

For example, if inflation is between 2-3% and interest rates don’t rise, £100 could be the equivalent of just £86 in five years’ time.

Inflation is also the enemy of bonds.

Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation can be a problem, as it erodes the real return you receive.

To mitigate this risk, you could invest in a fund like AXA Sterling Credit Short Duration Bond, which only invests in bonds close to maturity, or index-linked corporate bonds. However, the latter is a little questionable at the moment as the prices are so high you could just be locking in a negative yield in real returns. They can also be very volatile.

Alternatively you could invest in a bond that has a high yield, which may provide a bit of a buffer against the effects of inflation. GAM Star Credit Opportunities is worth a look and has a yield of 4.5%* and Invesco Perpetual Monthly Income Plus is also an option, with a yield of 5.5%*.”

Select equities

There are some companies that do better than others in inflationary environments. Cash generation provides a buffer for a company, enabling it to self-fund its operations through tougher times. And pricing power is particularly important, as the company may be better able to offset rising costs by passing them on to customers (as Unilever attempted last week).

Infrastructure is also a good bet, as toll roads, for example, have prices linked to inflation. You could consider First State Global Listed Infrastructure or VT UK Infrastructure Income.

Energy companies also tend to do well. While they are heavily regulated, the regulator will allow them to raise prices in line with inflation. So the likes of utilities stocks or even gas companies may be attractive, or a fund like Guinness Global Energy.

If you think we will get hyperinflation then gold is a good option. I like BlackRock Gold & General!

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