MR MONEY MAKER: Protect your savings from inflation threat

What’s happening?

Back in the 1970s, when some of us were irresponsibly growing our hair and wearing loon pants, I remember seeing the horror on my father’s face when he realised just how much of his retirement money had disappeared. 

This was not through any stupid investment decisions on his part, but as a result of the economic catastrophe that was rampant inflation in our economy. 

Pathetic politicians seemed powerless in the face of this economic acid, which dissolved the value of assets. 

For a short period it peaked at just under 25 per cent per annum, which had such a dreadful effect on the economy, that the term ‘banana republic’ seemed almost applicable. 

Why Does It Matter?

You might think this is a history lesson and that the current level of inflation is nowhere near the Seventies nightmare. 

But inflation requires constant vigilance. Too much is disastrous, just as deflation (falling prices) also can be. What we actually need is Goldilocks inflation, which is a bit like her bears’ best porridge, neither too hot nor too cold. Sadly, Goldilocks is fiction and so lukewarm inflation is not easy to achieve consistently. 

Recently the governor of the Bank of England thought that UK inflation may well be around 4 per cent this year but thereafter hopefully keep to his target of 2 per cent. I hope he is right, but some of the indicators point to a potentially more dangerous scenario. 

What Should I Do? 

With interest rates effectively at 0 per cent, we are losing value in real terms on our deposit accounts, and so people have been tempted to turn to other offerings purporting to provide ‘real’ returns higher than inflation. The stock market should technically provide a better return, but the FTSE 100 yield is still only around 3.27 per cent. 

There are things we can do. First, there are government inflation-proof bonds which will at least match inflation. Alternatively there are some companies whose value will actually benefit from periods of inflation. We have seen commodity prices rising this year with both oil and gas up strongly, and although this is unlikely to be repeated in the short term, commodity prices are often one of base causes for inflation. 

Also, of course ,the question of gold comes in here, as probably the oldest investment to beat inflation from Cleopatra to Covid. 

While commodities may not be very popular in terms of environmental issues, they do provide a good hedge against rising inflation, especially if you think that the global economy will continue its recovery following its cardiac arrest last year.

Any Suggestions? 

One simple way to address this is through the Blackrock World Mining Trust, which provides a well-diversified entry into the commodity mining sector. If, though, you would prefer a greater gold focus, then the iShares Physical Gold ETC, which is backed by the real stuff and is invested in just one inflation proof entity – the yellow metal. 

Justin Urquhart Stewart co-founded fund manager 7IM and is chairman of investment platform Regionally.