Prices have been rising at their fastest rate for five years. Annual inflation (as measured by the Consumer Prices Index or CPI) rose to 3% in September, stayed at this rate in October and then rose to 3.1% in November.
This led to the Bank of England increasing interest rates in early November for the first time in a decade.
Rising prices can be challenging for both savers and investors because it reduces the spending power of your money over time. So how can you help counter the effects of rising inflation and low interest rates in your investment choices?
- Boost your cash returns…
The savers amongst you may welcome the interest rate rise but only if the banks and building societies increase savings rates in line. But further rises are likely to be small and slow, and gains could be wiped out by still higher inflation.
Keith Bonner, Director and IFA at Pembroke Financial Services of Shoreham says “Be prepared to switch accounts to take advantage of better deals that appear in the market over the next few months. We can certainly help you with this as we use modern, up-to-date savings account comparison software geared to find the best deal for you.”
- It could be bad news for bonds…
Higher interest rates and rising inflation are bad news for those with ‘fixed-interest’ investments such as corporate bonds and gilts. These investments pay a fixed return which can look less attractive if interest rates rise significantly. Higher inflation can also reduce the value of fixed income over time. Both can weaken demand which causes prices to fall. Bonds do offer reliable income streams, however, so it is important not to avoid them completely.
Keith further says “Diversify where you are able and be aware that market conditions could mean valuations slip in the short term.”
- Stick with the stock market…?
Shares can be a great hedge against inflation, because companies have the potential to grow their profits broadly in line with inflation. However, share prices can be volatile, particularly over shorter timeframes so, yet again, it’s essential to diversify.
In periods of higher inflation investors tend to favour secure companies with consistent earnings that pay reliable dividends.
Some shares can be adversely affected by higher inflation and an example here would be retailers who can find that their margins come under pressure if the prices of wholesale goods rise. Similarly, higher interest rates will be bad news for companies with high levels of debt, although it may benefit banks.
In conclusion, Keith comments “Investors should be wary about making too many changes based on predictions or short-term market movements. In our unique in-house Pembroke investment portfolios we concentrate on your longer-term aims by ensuring that you enjoy actively managed, well balanced and diversified portfolios.
If you’d like to review your investments, please call 01273 774855 or email us by clicking here.
The value of your investment 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. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.