How to plan your investment with inflation touching new highs

Highlights

• Inflation levels in the UK are expected to hit 5% next year, as per NIESR.
• Saving accounts are not a feasible option to protect your savings from rising inflation levels.
• The key to beat inflation is to invest in the stock market and create a highly diversified portfolio. 

The risks related to sticky inflation and economic stagnation are hovering over the UK economy and their persistence is expected over the upcoming years. Disruptions due to Brexit, followed by supply chain problems and soaring energy costs, have led to the ongoing inflationary trend, which is here to stay for a while, as recently warned by the National Institute of Economic and Social Research (NIESR).

According to the think tank, inflation levels in the UK are expected to hit 5% next year, which may lead to catastrophic consequences for the country.

How to plan your investment with inflation touching new highs

Inflation, or money losing its value over time, has been a significant issue for investors in the prevailing economic climate, in addition to increasing the burden on the Government. Inflation levels have been above the 2% target set by the Bank of England over the past months.

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Tackling inflation with a savings account is not really feasible in this low interest rate environment, as the rates offered by banks are far less than the rate of inflation. The value of your money is bound to be eroded by inflation in a savings account and thus it is important to invest your hard-earned money strategically.

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How to beat inflation?

The key to beat inflation is to invest in the stock market and create a highly diversified portfolio which helps in the maximisation of long-term risk-adjusted returns, no matter what the level of inflation is. Investments should be made in the companies and sectors which are inflation-proof and using tax shelters is a great option to protect your investment returns.

Despite going for safer investment options, you may be at risk of losing. For instance, rising inflation levels may significantly impact the low-yield long dated bonds in your portfolio. These bonds are sensitive to the slightest changes in interest rates and thus have the ability to expose your entire portfolio to market volatility. Index or inflation-linked bonds are a better investment option as compared to conventional bonds, as their returns rise along with inflation levels.

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Options worth exploring

While investing in stock markets, the investors must meticulously research their stock options first, as some stocks have a better chance of doing well than other in times of high inflation. Rising interest rates due to increasing inflation levels may prove out to be beneficial for lenders, while on the other hand, the same hike in interest rates could be disastrous for sectors like utilities and real estate, as they are more sensitive towards the increasing bond yields.

Thus, analysts suggest that investors should go for companies that have the power to set prices for their products, so that the consumers can bear the burden of rising costs, thus protecting the company’s profits from inflation.

Banking sector also gains from higher interest rates as the banks can earn more from its lending activities. Exposing your portfolio to mining and energy sector stocks may be useful too in countering inflation due to rising prices of commodities. Sectors like infrastructure should also be considered by investors as the demand for new roads, power supplies and telecommunications networks rarely ever fade away.

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Investors also look at gold as a hedge against inflation and think of it as a stable investment as compared to the other volatile assets. Gold is known for being one of the best diversifiers amid rising inflation, but it may not always prove to be the case, especially in the short run. Thus, gold can also be a volatile asset despite its strong inverse relationship with interest rates.

Summing up

The poor are hit the hardest due to rising inflation levels and thus it is more important for the lower income class to protect their savings from inflation. Exploring the stock markets is the best possible bet to beat inflation. But all investments should be made while considering the risks associated with them.

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