Rising inflation has renewed concerns that surging prices have yet to peak, putting pressure on household budgets, savings and investments, as well as the Bank of England.
Official figures released last week showed UK Consumer Price Inflation increased by 0.7% in August to an annual rate of 3.2%, higher than expectations.
Longer-term risk
Jason Hollands, managing director at online investment service Bestinvest, said: “While rising inflation reflects the rebound in the economy after last year’s sharp contraction and the temporary effect of supply chain blockages in certain areas, there is also a risk that some of this could prove more persistent should the economy start to overheat.
“This may, in turn, prompt the Bank of England to wind down its stimulus programme, which has kept borrowing costs extremely low during the pandemic.”
He added: “Price rises are going to squeeze the budgets of many households and will add pressure on businesses to raise wages.
“Many households were able to build up their savings during the repeated lockdowns, but the surge in inflation threatens to erode the real value of these cash war chests.
“While it is very wise to keep a cash buffer for short-term needs and emergencies, holding too much cash for long periods of time will see the real value of this wealth eaten away by inflation like a hungry rat tucking into a piece of cheese.
“I would urge people to consider whether they have the right balance between cash savings and long-term investments.”
What should investors do?
Beating inflation should be a key objective for long-term assets,” Mr Hollands said, adding: “Equities offer far greater potential than bonds – 10-year gilts are currently yielding 0.74%, so are negative in real terms once adjusted for inflation.
“Within the spectrum of equities, there is a good case for owning dividend-generating funds as these provide an element of predictability providing pay-outs are sustainable.
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“Other asset classes that can help inflation-proof an investment portfolio include infrastructure and gold.
“Ultimately, a little bit of inflation is not necessarily a bad thing, but if inflation persists at a higher level than the Bank of England’s long-term target rate of 2% for a prolonged period, it would be problematic for family budgets, businesses, savers and investors.”