Is inflation becoming sticky?

SouthCoastBoy

I get the impression the BoE are getting concerned high inflation is here to stay for a while. If this is the case I can see taxation having to increase so benefits continue rising with inflation and dc pensions will be taking a hit. Does anybody have a strategy to protect their wealth? I have set up a few assets in my watch list including wealth protection funds, which to me appear to be underperforming when compared to uk inflation of 10%, commodities have been my best performers. Any ideas of other ways of protecting wealth, gold maybe?

El_Torro

What makes you think that the BoE expects inflation to remain high? Currently the predictions are that inflation will be at a much more sensible level by the end of this year.

NedS

I keep reading experts saying that inflation will fall back significantly over the next 6 months. I'm not buying it - I'm in the higher for longer camp. I think we have 2 more rate rises to come from BoE taking rates to 4.75% by the end of the year maybe falling back to 4% in 2024.

I think a lot of inflation has yet to fully enter the system. Lots of businesses on fixed term energy costs have yet to take that hit, and then it takes months to pass the increases on to their customers. Many home owners on fixed term mortgages have yet to be impacted by rising interest rates so they have yet to really curb their spending further driving inflation.

If you think higher inflation will be here for a while, then inflation-linked gilts (1-2 year duration) are an obvious suggestion.

SouthCoastBoy

With the latest comment from huw pill and comments made by andrew bailey in the past where he has mentioned higher wage demands could mean higher inflation for longer.

SouthCoastBoy

NedS said:

I keep reading experts saying that inflation will fall back significantly over the next 6 months. I'm not buying it - I'm in the higher for longer camp. I think we have 2 more rate rises to come from BoE taking rates to 4.75% by the end of the year maybe falling back to 4% in 2024.

I think a lot of inflation has yet to fully enter the system. Lots of businesses on fixed term energy costs have yet to take that hit, and then it takes months to pass the increases on to their customers. Many home owners on fixed term mortgages have yet to be impacted by rising interest rates so they have yet to really curb their spending further driving inflation.

If you think higher inflation will be here for a while, then inflation-linked gilts (1-2 year duration) are an obvious suggestion.

Thanks, I've tried looking at bonds in h&l and I can only find funds as opposed to individual bonds, is it possible to buy bonds through h&l?

michaels

Money market funds.  Sadly I think the labour market remaining tight is the main driver of 'sticky' inflation.  The vitriol that greeted Huw Pill when he was merely stating the obvious re the adverse terms of trade impact on real incomes has been extreme.  I suspect it basically goes hand in hand with better than expected economic performance and as you say, until interest rate increases start hurting then they are not working.

Personally this is annoying, my 5 year mortgage fix ends in October and I was hoping to roll on to a sensible 5 year fix that would span retirement in a years time.  In theory I have the funds to pay of the mortgage but some is tied up in a loan to a step child and I enjoy the flexibility of having a readily available cash pot. In theory I could do a 2 year fix/tracker in the hope of then picking up a cheap 5 year - except I will then no longer be earning so my lend-ability will probably be much lower.

mcc100

https://www.telegraph.co.uk/business/2023/04/26/pension-funds-prediction-inflation-bank-of-england/

NedS

SouthCoastBoy said:

NedS said:

I keep reading experts saying that inflation will fall back significantly over the next 6 months. I'm not buying it - I'm in the higher for longer camp. I think we have 2 more rate rises to come from BoE taking rates to 4.75% by the end of the year maybe falling back to 4% in 2024.

I think a lot of inflation has yet to fully enter the system. Lots of businesses on fixed term energy costs have yet to take that hit, and then it takes months to pass the increases on to their customers. Many home owners on fixed term mortgages have yet to be impacted by rising interest rates so they have yet to really curb their spending further driving inflation.

If you think higher inflation will be here for a while, then inflation-linked gilts (1-2 year duration) are an obvious suggestion.

Thanks, I've tried looking at bonds in h&l and I can only find funds as opposed to individual bonds, is it possible to buy bonds through h&l?

Gilts and indexed-linked gilts are here:

https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/uk-gilts

It seems index-linked gilts are only available to purchase over the phone, but regular gilts can by traded online, although I'm not sure they represent good value if you think rates will remain higher for longer. TN25 (UK gilt maturing on 31/1/2025) is currently yielding ~4.1% YTM which doesn't seem great given money market funds are yielding that and are floating rate and likely to rise over the next few months, but you are at least locking that rate in during 2024. A similarly dated linker may give a better return.

JohnWinder

Does anybody have a strategy to protect their wealth?’

Yes, but it might not work. I have a mix of cash, bond funds and stock funds and I don’t mess with them on chatter about what the short or medium term future might bring to inflation, interest rates, stock yields, national debt etc. The mix is investment grade bond and widely diversified stock funds. There’s a proper chance it won’t protect my wealth in real terms, but I’m aiming for ‘high-ish’ returns so I take that risk. If I could be satisfied with just protecting my wealth I’d hold intermediate and long term linkers as they’re all giving positive real returns, ie wealth protection against inflation, market crashes and government collapses (outside UK!).

Why? There’s a bit of evidence that the more you fiddle with a portfolio, like soap in the bath, the smaller you make it. https://faculty.haas.berkeley.edu/odean/Papers current versions/DoInvestors.pdf.

Secondly, changing a portfolio on the basis of upcoming economic conditions requires you to both anticipate the conditions correctly and be right about how asset classes will respond. It’s how a lot of the investment industry makes its living which makes them professionals. You have to hope you’re not trading with professionals when you change your portfolio, because if one party wins in a trade the other loses. How are you up against professionals? If you think they achieve their results through mostly skill, it would be unwise for the likes of me and ?you to trade with them. If you think they achieve their results with luck mostly, I’m not confident I’m luckier than them.

So I developed a portfolio which recognised inflation and deflation might be horrible at times in the next 40 years, markets might crash 50% for a decade or two, some governments might default on their bonds, and the odd bank will blow up my cash holdings with them. My portfolio won’t outperform others’ under all conditions, but if history is a guide it will outperform most professionals’ efforts for the risks I’m taking, because it’s in index funds with low fees, platform costs, advisor charges etc.

In December 2021 you posted: 

‘with the BoE appearing to have no intention to raise interest rates by a significant amount in the short term. ’

The Bank rose its rate nine times starting the next month. One questionably poor suggestion at a guess doesn’t condemn you, but it shows it ain’t easy.

So, you could get a feel for how asset classes have performed in the past, consider your circumstances, and invest accordingly. Ignore the chatter.

Albermarle

What makes you think that the BoE expects inflation to remain high? Currently the predictions are that inflation will be at a much more sensible level by the end of this year.

I keep reading experts saying that inflation will fall back significantly over the next 6 months. I'm not buying it - I'm in the higher for longer camp.

My take is something in the middle ( I like to hedge my bets ). It will come down, but more slowly than originally predicted. Maybe 5 or even 6% by the end of the year ?

One thing for sure is that pleas to companies to moderate price increases will fall on deaf ears. Business/selling is about maximising prices/profits. So if any  company thinks they can get a higher price without losing any business, then they will increase the price, regardless of whether general  inflation is going up or down.

handful

I think the rate will come down pretty sharply now fuel costs are reducing and we are now comparing YOY (after Ukraine war started) when most of the price increases were already there. It's food inflation that is making things a bit sticky but I think the supermarkets will start to price more aggressively in the coming months. My guess is 4-5% by the end of the year.