How to mitigate the effects of inflation on your assets

What is happening?

“I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more quantitative easing, a new potential infrastructure bill, a successful vaccine roll out and euphoria around the end of the pandemic, that the US economy will likely boom. This boom could easily run into 2023 because all spending could extend well into 2023”.

Jamie Dimon, Chief Executive of JP Morgan Chase, the largest of the big four American banks, May 2021

These comments chime with recent charts showing that the percentage of businesses raising prices is at a 35-year high. A year ago, businesses were planning for Armageddon, while today some have never had it so good. On the ground experience is instructive. My barber is 50% more expensive, a pint of beer is £7.60 and my favourite Magnum ice cream, whilst only pennies more expensive than last year, must be at least 20% smaller.

Used car prices are at all-time highs. Copper, hot rolled steel and timber prices are at decade highs. The price of container shipping is at a 17-year high.

Companies cannot get staff; wages are being forced up. McDonalds is paying candidates £50 just to show up for interviews.

Shortages are a key sign of inflation and yet the Bank of England, the Federal Reserve Bank of America and the European Central Bank all insist that inflation will fall back below target after a temporary period of above-target inflation.

But what if they wrong and inflation gets worse. Rising inflation means that we need a strategy to mitigate its effects.

The implications

Higher inflation has financial implications for everyone, especially if you are retired. It is important to establish what parts of your outgoings may rise and by how much.

At Clarion we look at each client’s expenditure and how much they spend relative to their liquid wealth. Some items of expenditure rise at a higher rate than standard inflation, for example, school fees and long-term care costs.

Inflation can erode the value of assets which might further reduce your future spending power. So, it is important to know how your wealth is distributed and how inflation might affect what you own. Understand what you have got and how it works and establish the positive and negative effects inflation might have on your assets.

Investments that provide income in retirement should generate a return that at least keeps pace with inflation. But it does not mean you should put all your assets into higher risk, higher return investments. Getting the right balance between holding cash and higher growth assets is very important.

How should I invest?

Despite the early warning signs discussed above, the outlook for inflation is still difficult to judge at this stage. The dislocation in the economy caused by the reopening and the base effects from a year ago mean that it will probably take at least six to 12 months before a clear picture of the underlying inflation trend begins to emerge.

Past inflation alarms, as economies recovered in the wake of the dotcom bust in the early 2000s and the financial crisis of 2008, proved false dawns. The well-entrenched disinflationary trends of ageing populations and falling costs associated with technological innovation have not gone away.

For such reasons, a number of investors expect inflationary pressures this year will prove to be “transitory” but stacked against the deflationary forces is the immense scale of the monetary and fiscal stimulus of the past year.

We continue to believe that a balanced approach, as opposed to betting on one or other outcome, will produce the strongest returns for investors over time. Inflation is an enormous risk when seeking to preserve and grow one’s capital, but so is positioning for it and it never materialising.

Our key defences against inflation are our low-risk, short-dated inflation-linked, and conventional bonds combined with the pricing power embedded in our equity portfolios and in some funds, a small exposure to gold and silver. Diversification provides both a defence and an opportunity to grow the real value of your wealth over time.

A survival strategy

Inflation is only one of the risks that should be looked at and a sound financial plan and investment strategy should be based on more than just inflation protection. It should pull together a number of risks, objectives, preferences and circumstances that all flow into the overall end result.

A lifetime cash flow strategy looking at different scenarios for both inflation and investment returns will help to provide comfort that you are not going to run out of money during your lifetime.

Clarion have been providing sound financial plans, lifetime cash flow strategies and investment solutions for over 35 years so do not waste energy and time worrying about inflation, take control of the situation and consult the experts.

Keith W Thompson

Clarion Group Chairman

July 2021

Creating better lives now and in the future for our clients, their families and those who are important to them.

Risk Warnings

Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.