Investments, always subject to a variety of risks that can impact their value, are never safe. For example, the value of your investment could decline due to the performance of the company you invested in. If you hold
fixed-rate bonds, a spike in interest rates could cause the value of your investment to fall, as demand switches to higher rate bonds.
But another investment risk has once again reared its head: high inflation. Usually measured as the average increase in consumer prices over a year, inflation erodes spending power if income or returns do not keep pace.
So, a fixed-rate bond that pays 2% would actually depreciate in value in a year where inflation runs at an average rate of 3% — despite the numbers in your bank account ticking upwards.
In the 12 months to March 2023, inflation hit 10.1% and, according to the Office for Budget Responsibility (OBR), will average 6.1% for 2023. The OBR then forecasts inflation will drop to around 0% in mid 2026.
Remember, though, that the Bank of England’s target is 2%, which it and the Government will want to return to. After all, a small amount of inflation is actually a sign of a healthy economy and acts as a barrier against the damages deflation (negative inflation) can bring. So, while making inflation-proof investments is essential in the short-term, inflation is something that investors always need to bear in mind in the future.
Here are some of the methods you can use to inflation-proof your investments.
Disclaimer: the following are investment methods that may or may not suit your situation, but should not be taken as investment advice. Always talk to a financial adviser before investing.
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.