The Return of Inflation & Investments
UK annual Inflation has reached a decade-high, with sharp increases being seen in the recent months. In November, inflation has exceeded 5%, and reports from the Bank of England suggest that the return of high inflation will continue into 2022.
Rising inflation affects many economical factors, including investments – that’s why it’s important to understand why we have seen a huge increase in inflation, as well as how this will impact your portfolio, so you can continue to grow your capital successfully and reach your financial goals.
What has happened with inflation?
- In February 2021…
The UK’s inflation was only 0.4%, as measured by the Consumer Price Index (CPI), or 1.4% as measured by the Retail Price Index (RPI).
- In July 2021…
CPI inflation in the UK reached 2.0%, and RPI inflation reached 3.8%. Similar trends were also experienced across the globe, with US inflation rising from 1.7% to 5.4% in the same period, and the Eurozone reaching 2.2% inflation in July 2021.
- In November 2021…
Inflation reached 5.2% in the UK, as measured by the CPI. In the previous month, CPI inflation was also high, reaching 4.2%.
Why has inflation jumped?
The sharp and widespread inflation being experienced in the UK, and across the globe, is predominately related to the developed world’s economic recovery from the pandemic.
A clear sign of this economic fallout is the surge in the cost of purchasing a second-hand car in both the UK and the US. The price rise is directly linked to the reduced number of new vehicles available to buy, which relates to microchips shortages slowing down production in the automotive industry.
What will happen to inflation after the pandemic?
Economists hold two schools of thought surrounding inflation in the UK, and what will happen after the pandemic. These are:
- “Transitory” inflation
Some economists, including central bankers in the UK, US and Eurozone, are expecting inflation to return to pre-pandemic levels as the impact of the pandemic on the global economy decreases.
- Inflationary spiral
However, some economists fear that inflation will continue, encouraging ongoing rising prices and parallel wage increases.
How will the return of inflation impact investments?
Investors are always looking to increase their long-term purchasing power, and inflation can threaten growth, especially if investment returns do not rise in conjunction with interest rates.
With fixed-rate investments, such as bond funds, rising inflation will negatively impact the value of investments – which happens due to future payments of interest being smaller in real terms, leading to the long-term ROI being smaller.
Index-linked bonds (ILBs), on the other hand, can help to hedge against the risk of inflation. Many investors turn to these bonds as cover, due to their tendency to rise when inflation is on the horizon.
However, investing in shares can have long-term benefits when inflation is high, although it can affect short term return, due to reduced company profits and wage pressures that can impact share prices. By investing in shares rather than bonds or cash deposits, investors can help to protect their finances against inflation in the long term, as stocks tend to be less impacted by inflation.
Why is portfolio diversification important?
With the return of inflation in the UK, now is an ideal time to review and diversify your investment portfolio – but what are the objectives of portfolio diversification?
A diversified portfolio can help ensure that, whether inflation drops or is here to stay, your investments will continue to bring a return. By speaking to a financial planner, you can help ensure that your investment portfolio is prepared for economic changes.
How can KLO Financial Services help?
At KLO Financial Services, our independent financial advisers and investment analyst can help you better understand the impact of inflation on your investments and ensure investment diversification.
Want to find out more about our personal financial services? Get in touch with one of our financial advisers in Warwick, Birmingham and London on 01926 492406!
Any research is for information purposes only and does not constitute financial advice. The value of investments and any income from them may go down as well as up, so you may get back less than you invested. Past performance cannot be relied upon as a guide to future performance. KLO Financial Services Ltd are registered in the UK, company number 08711328. We are authorised and regulated by the Financial Conduct Authority, reference 710272.