Inflation

handful

I posted my fears in July last year here https://forums.moneysavingexpert.com/discussion/6278701/investment-choices-for-an-inflation-pessimist/p1  Worth a read for some context and to see how the varying advice is panning out!

tichtich

I have a large proportion of my retirement funds in UK renewable energy companies like Greencoat UK Wind (UKW). Their RPI-linked subsidies should give them good protection from inflation. In fact UKW has a policy of increasing its dividend annually in line with RPI (which has recently been a couple of percentage points higher than CPI). There's no guarantee they will be able to continue this indefinitely, but with their high dividend cover I think it's pretty safe for the medium term at least. The current dividend yield is about 4.6% (5.2% at the price I invested).

I think these stocks are fairly priced, so should maintain their real value in the long run. If there's a market crash they'll probably fall less than the average,  and anyway I'm willing to hold them until they come out the other side,  while receiving good dividends in the meantime.

I don't expect any real growth from these shares (that's not what they're designed for). But given the current outlook I'll settle for a fairly safe 5% real return.

TonyTeacake

SouthCoastBoy said:

Bravepants said:

SouthCoastBoy said:

biscan25 said:

Definitely a concern, it has been for the last 18-24 months.
I've diversified my (non-cash) investments outside of my pension which were previously almost 100% equities (which provide some, but very imperfect hedging), to include some "real" assets (I bought a house!, some alternative luxury goods etc, the odd NFT ), but pension is still 100% equity. 

Interesting about buying a house to protect some wealth, I have considered buying a larger house for this reason, but I'm not sure if the house will be inflation proof considering the current high house prices, associated buying and selling costs and the fact interest rates should be rising (not convinced the BoE will do this to any great level though, think they will drag their feet).

It's not so much the house that is inflation proof, but the long period fixed-rate mortgage you obtain to buy the house. If the mrtgage interest rate is 2% over 5 or 10 years (unlikely now I think) and inflation is 7% for the same period then you are effectively inflating away the mortgage. It relies on getting a long term low interest rate, and inflation being high for the same period.

Yes I have considered locking in a 10 year fixed rate mortgage on a larger property for this very reason, the only negative consideration if house prices decrease say 30% in this period.

I think we will have high inflation for most of this decade or maybe longer. The main tool for bringing inflation down is interest rates. The BOE have got all of their forecasts wrong and when they realise this inflation monster is going nowhere they just might  start to be more aggressive with rate hikes. Although this will cause a lot of pain especially in the housing market, it maybe the only choice, or they can do nothing and let inflation runaway and then we will have hyperinflation which will be disastrous.

Either way we can expect some real pain in the economy. The housing market is already slowing down and house prices will have declined by the end of the year. This inflation monster isn't fully going yet so within the next 12-24 months expect to see the housing market crash like we have never seen before. Big price declines have already started in Australia, Canada and USA, and we are not far behind.

Sea_Shell

I understand that mortgage providers are supposed to "stress test" people's ability to borrow if interest rates rise.  However will they have also factored in possible wider inflation and all the other costs people are now being faced with.

Will they have lent, over the last few years, based on assumptions that are going to seem far too "unstressed" in the current climate?

arnoldy

Virtually everyone with a private sector DBs should be very concerned - the overwhelming majority of these will be capped at a blended rate of 2.5%-3.5%. At least with DC pensions the data shows that over the investment cycle the money keeps value with inflation. With private sector DBs most people will be about 7% worse off in real terms for the rest of their lives after this year.

For many of those who purchased "fixed annuities" high inflation could be life changing disaster.

THE BoE needs to get a grip with interest rates currently 1% but inflation 8% and rising, the government needs to stop throwing money around.

tichtich

Good points, Arnoldy. Unfortunately I have a fixed annuity, though fortunately it won't be the bulk of my retirement income, and I've made a point of not relying on it. Still, inflation will be a significant negative for me, so I'm trying to hedge by skewing my investments towards ones that are protected against inflation, and perhaps will even benefit from it. 

Albermarle

so I'm trying to hedge by skewing my investments towards ones that are protected against inflation, and perhaps will even benefit from it. 

Could be useful for many readers to know what these inflation protected investments are ?

At least with DC pensions the data shows that over the investment cycle the money keeps value with inflation. With private sector DBs most people will be about 7% worse off in real terms for the rest of their lives after this year.

I do not think many DC pensions holders will be feeling that great this year. Including inflation most will be around 20% worse off so far this year, and could take years to recover that, if the global economy really slows down.

Basically 2022 is a bad year for most people, whether retired, working, or worst of all living on the breadline. Probably best to write it off as bad job and hope things improve next year. Personally I think inflationary pressure will start to ease going into 2023. Savings rates will also be better, but the general outlook for UK and global economy will be a bit flat at best.

michaels

Two sources of inflation, external global price increases and a domestic supply/demand imbalance.

Interest rates can do little to prevent the former.

For the latter the former is actually taking so much money out of the economy that pretty soon demand will have contracted to no longer exceed supply.  Once this feeds through to the jobs market then we should see wages slow down and the domestic component of inflation disappear.

The only way I see prolonged inflation is if global commodity prices continue to rise (not just stay high) or the govt supplies too much money to the domestic economy creating demand.

Ask yourself - given that you can borrow at real terms -7%, why don't you? 

jangus74

I'll tell you how I feel about it. The CPI figures are massively manipulated and were still at nearly 10%. If the government told us all what the real figure was there would be rioting in the streets. Our wealth is being systematically transferred to the banks and large corporations - its criminal. But then what do you expect when the BoE keeps inventing more money out of thin air and lending it to the Government. The whole system is falling apart 

jangus74

I have sold all of my stocks and shares and would withdraw everything from my pension if I was allowed. Where are you going to make (in reality) 20% return on your investments unless youre Warren buffet? Traditional investments in the current climate are a complete waste of time and youre actually losing your money. Might as well take a punt on something like Bitcoin, at least then you'll know its not going to the fat cats bonusses and being wasted by our incompetent government.

Rant over....I feel much better now