For several months, the UK has struggled with a period of prolonged inflation, largely caused by the war in Ukraine.
Due to the sanctions on Russian oil and gas, as well as the disruption to global supply chains, the cost of living has spiked in the past few weeks. According to data from the Office for National Statistics (ONS) the Consumer Price Index (CPI) rose by 10.1% in the year to July 2022.
Prolonged inflation can pose problems for your money, as it can erode the value of your cash while simultaneously reducing the real returns of your investments in your portfolio. That’s why you might be wondering how to give your wealth the best chance of growing effectively during this time.
Read on to find out why inflation has been rising, as well as some areas that you could consider investing in during this difficult time.
Global events, such as the war in Ukraine, have caused inflation to spike
One of the most important responsibilities of the Bank of England (BoE) is to keep the annual rate of inflation at a steady and manageable level. This is because while a small amount helps to keep the wheels of the economy turning, too much can pose serious problems.
That’s why the recent announcement that the rate of inflation is almost five times the BoE’s target of 2% each year might have sent alarm bells ringing.
One of the biggest causes for the sudden spike is the Russian invasion of Ukraine, which has caused the price of food to rise sharply. According to the ONS, in 2021 the UK imported around £830 million of goods from the beleaguered country, mostly in the form of agricultural products.
Furthermore, the international sanctions imposed on Russia have caused the price of oil and gas to rise, pushing up the cost of fuel. In June, the Guardian reported that the cost of filling up a family car had risen to above £100.
On top of this, many global supply chains are still recovering from the effects of the coronavirus pandemic, which has made many goods more expensive to import.
During periods of high inflation, it can be tricky to choose where to invest
When inflation is running hot, there are several areas that investors typically turn to, in order to preserve and keep building their wealth. Below are some of the most popular ones that you could consider adding to your portfolio.
One option to consider is to buy equities in companies that produce consumer goods, as they typically perform well during periods of moderate inflation. For a start, rising prices encourage consumers to buy now rather than later, helping to boost a business’s profits.
Of course, it’s important to remember that equities aren’t always a reliable hedge against inflation in the short term. For a start, the rising cost of overheads (such as wages and raw materials) can affect their profit margin just as much as any other business.
On top of this, if the rate of inflation becomes too high then consumers may reduce their spending, which can hurt a company’s profits and, typically, the value of your investment.
Natural resources and mining
If you’re uncertain about the profitability of consumer goods companies during a period of high inflation, you could consider investing in a business that specialises in resource extraction. For example, this may include fields such as mining or oil drilling.
The benefit of investing in such companies is that even in an economic downturn, there is often still a strong demand for raw materials. This means that even in an inflationary environment, the value of the goods they produce tends to rise.
Of course, it’s important to bear in mind that if this period of high inflation leads to a significant economic downturn, the value of resource extraction companies could also fall.
During periods of economic difficulty, one area that investors have historically flocked to is commodities such as gold. These are often seen as safe havens that preserve wealth when times are hard, as their value is typically subject to different pressures than other choices.
On top of this, in the past few months the price of gold has surged, which has convinced some people that it could even be a growth asset. According to figures published in This is Money, the outbreak of war in Ukraine pushed the precious metal’s price to a near record high.
Of course, while commodities are often useful for maintaining value, they aren’t always good choices if you want your wealth to grow. Since their cost is determined almost entirely by market demand, you’re essentially betting on what people are willing to pay for it in a year’s time.
Furthermore, you may also need to factor in the cost of storing or insuring physical commodities, such as gold bullion, against loss or theft. This cost can eat into any potential profits you might generate.
Working with a planner can help you to choose the right investments
If you want to protect your wealth against the effects of rising inflation, seeking professional financial advice can really help.
At Rosebridge, we can act as a valuable sounding board when you consider a potential investment. This can help you to make a properly informed decision with your wealth, giving you a greater sense of confidence when you act.
Additionally, if you do decide to invest in equities (such as in the areas mentioned above), we can help you to determine what amount of risk you are willing to tolerate. While you may want to outpace inflation, you may also need to think about how this decision fits into your overall financial plan.
Typically, the more risk you are willing to tolerate, the greater the returns can be on your investments. That being said, exposing yourself to too much risk could pose a serious problem in the event of a market downturn.
That’s why it’s so important to work with a financial planner, as we can help you to grow your wealth and comfortably reach your long-term goals.
Get in touch
If you want to know how to inflation-proof your portfolio, we can help. Email email@example.com or call 01204 300010 to speak to us today.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.