Inflation

Steve182

RG2015 said:

Steve182 said:

RG2015 said:

GeordieGeorge said:

RG2015 said:

There is a rather dramatic thread started today titled inflation and economic crash. I do not subscribe to this somewhat irrational fear but do have some concerns. Inflation hits savings and an economic crash hits investments.

My question is what, if anything can be done to mitigate against the consequences of any large increase in inflation in the next year or two?

You can buy inflation-linked bonds, or place a spread-bet on inflation through a company such as City Index. 

I was not aware that inflation linked bonds were currently available. As regards spread betting, that sounds link a bit of a gamble.

A hedge is not a gamble, on the contrary, it's an insurance policy.

I said spread betting sounds like a gamble. It was a joke. 

Sorry, the brain's really slow tonight!!! 

underground99

RG2015 said:

GeordieGeorge said:

RG2015 said:

There is a rather dramatic thread started today titled inflation and economic crash. I do not subscribe to this somewhat irrational fear but do have some concerns. Inflation hits savings and an economic crash hits investments.

My question is what, if anything can be done to mitigate against the consequences of any large increase in inflation in the next year or two?

You can buy inflation-linked bonds, or place a spread-bet on inflation through a company such as City Index. 

I was not aware that inflation linked bonds were currently available. As regards spread betting, that sounds link a bit of a gamble.

The problem is that both buying index-linked government bonds and placing bets on an increase in inflation rate will only pay off if the increase in inflation is bigger than what is expected by the market that currently prices the bonds and the bets.

In other words, the market is already pricing in a rise in inflation, so you're unlikely to make much money by guessing there's going to be some inflation. If you think there'll be inflation, you'd only 'win' if you're right that there was more inflation than the average market participant is currently expecting.

[Deleted User]

If you listen to economists, the big debate at the moment is about whether inflation is being driven by temporary factors or whether this is the start of a consistent rise in inflation. In reality, there are quite a lot of reasons to think this is just temporary. See this from the LSE for example: https://blogs.lse.ac.uk/europpblog/2021/05/03/should-central-banks-be-worried-about-rising-inflation/ 

masonic

There's a large component to inflation that's a self-fulfilling prophecy: if people expect it, they change their behaviour and create it. There's a generation of people now who see the last decade as normal and may have helped to keep inflation low thus far.

Nebulous2

masonic said:

There's a large component to inflation that's a self-fulfilling prophecy: if people expect it, they change their behaviour and create it. There's a generation of people now who see the last decade as normal and may have helped to keep inflation low thus far.

There are a lot of people, me included, who resist rises and change supplier or at least requote when they happen. Particularly annoying has been mobile providers increasing prices by cpi + 3.5%. Vodafone have just offered me a new broadband service, where they guarantee no in-contract increases, which suggests to me they have noticed this is becoming a source of resentment. 

I don’t expect the tug - of - war between consumers and providers to go away because we have stored some money during the pandemic. 

Linton

Some real data rather than isolated anecdotes.  My actual expenditure taking 2006/2007 as 100 on what I categorise as "basics" for the past 14 years , September- August:
2006/2007:  100
2007/2008: 97.7
2008/2009: 98.0
2009/2010:  102.4
2010/2011:  103.0
2011/2012:  105.4
2012/2013: 116.3
2013/2014: 102.2
2014/2015: 110.1
2015/2016: 113.4
2016/2017: 111.2
-------Moved to larger house
2017/2018:141.6
2018/2019: 122.2
2019/2020: 131.3

CPI 2007-2020: +41.9%  from BoE calculator.

So even if one doesnt take into account the non-inflation extra costs after house move basic expenditure has actually risen rather less than CPI over the past 13 years.  There is no evidence that CPI has been fixed in some way. If anyone else has data at this level of detail available perhaps they could share it.

masonic

Linton said:

If anyone else has data at this level of detail available perhaps they could share it.

Here is my data, again stripped out one-off discretionary type expenditure, by tax year:

2012/13 -  1.00
2013/14 -  1.04
2014/15 -  0.93
2015/16 -  0.93
2016/17 -  0.88
2017/18 -  0.98
2018/19 -  0.96
2019/20 -  1.01
2020/21 -  1.01

First two years seem to be skewed by an abnormally high spend on groceries, so perhaps fairer to calculate from 2014 onward, which would give me a personal inflation rate of 1.4% vs CPI/CPIH of 1.6%.

014london

Anyone got a view on putting your savings into a stocks and shares ISA, and then buying an inflation linked tracker like Vanguard's UK Inflation-Link Gilt Index? Wouldn't that (almost) guarantee that your savings keep up with inflation (minus the fraction of a percent of management costs)?

I've never understood why financial advisors don't recommend this. Is it because it wouldn't work?

Linton

014london said:

Anyone got a view on putting your savings into a stocks and shares ISA, and then buying an inflation linked tracker like Vanguard's UK Inflation-Link Gilt Index? Wouldn't that (almost) guarantee that your savings keep up with inflation (minus the fraction of a percent of management costs)?

I've never understood why financial advisors don't recommend this. Is it because it wouldn't work?

Two problems: 

 - Inflation linked gilts are more expensive than accrued inflation would imply with the effect that they will return a few %/year  less than inflation.  This is fine if you want some protection against very high inflation but not so good if inflation stays at current levels when you could actually make a loss.

 - The inflation linking is only guaranteed if you hold the gilts until maturity.  If there is some time between now and then the prices could be quite volatile with little linkage to inflation.  Index linked gilt tracker funds will typically hold gilts with a wide variety of maturity dates so you will never be redeeming them all at maturity.

masonic

014london said:

Anyone got a view on putting your savings into a stocks and shares ISA, and then buying an inflation linked tracker like Vanguard's UK Inflation-Link Gilt Index? Wouldn't that (almost) guarantee that your savings keep up with inflation (minus the fraction of a percent of management costs)?

I've never understood why financial advisors don't recommend this. Is it because it wouldn't work?

1 year IL Gilt yield to maturity: -4.2%

7 year IL Gilt yield to maturity: -3.1%

20 year IL Gilt yield to maturity: -2.6%

40 year IL Gilt yield to maturity: -2.4%

So, inflation minus 2.4-4.2%. You'd need pretty high inflation (or negative interest rates) for these to outperform cash savings. High inflation would lead to increases in interest rates, which would hit IL Gilt prices so you could suffer a substantial capital loss if you wanted to switch back to better paying savings accounts before maturity.

This is what is referred to by some as 'return free risk'