How to protect against inflation

The real question is when, not if, inflation will take hold, says Theo Casey. So how can you protect your wealth and profit from this coming storm?

I have a guilty secret that may come as quite a surprise

You see, I like to think of myself as perhaps the most bearish contributor on The Right Side, but I've just done something extremely bullish with my own money.

I've taken the plunge and am wading into the property market.

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I'm in the process of buying a place in Wimbledon in this housing bear market. Is this my attempt to call the bottom? No. Do I now think the woes of the British economy are behind us? Good Lord no!

Believe it or not, I've bought the place because I like the area and want to live there.

Of course, with the expense of buying it's impossible not to think about the financial commitment and, in time, I predict it will be a good investment. In a lot of time. For now though, I'm pleased as punch. The reason for this is because my monthly outgoings have been cut in half. I've taken on a mortgage at an absurdly low rate. A rate that I fixed for as long as I could.


Because I believe that we are going to enter a period of massive inflation leading ultimately to sustained rate rises. And I'm not the only one. The Telegraph's Liam Halligan is at the fore of the pro-inflation crowd noting that in the Bank of England's recent inflation report, "It has stopped warning of deflation because it is no longer credible to do so. In truth, it never was. CPI inflation remains at 2.9pc way above the Bank's target, as it has been for 31 of the last 33 months. As sterling has fallen, import prices have surged. In an open economy like the UK, that's highly inflationary."

That means that in the long run there is only one way for rates to go. Up. Indeed, it is time for us all to be protecting ourselves from the spectre of inflation. If you're not buying a house there are other ways to protect yourself. But first, more on the debate

Inflation or deflation?

As my colleague Bill Bonner recently put it, "Zimbabwe or Japan, that is the question."

In the Japanese corner are the deflationists. They believe the UK economy is heading into a spiral of lower output causing job losses, price cuts and wage cuts, ad infinitum. It's a very ugly problem that is the stuff of Mervyn King and Gordon Brown's worst nightmares.

In the Zimbabwean corner, are the inflationists predicting that our policy makers' desperate and relentless bailouts and buy-ups will "put cash in the hands of those who might spend it". And that is inflationary.

There is merit in both arguments, however it is only the inflationists that have momentum behind them. You see, it is the express wish of the government that we have a return of inflation. It's what quantitative easing is specifically designed to create. Deflation is a worse problem than inflation and a deflationary spiral would be crushing for the economy so the government is taking every step it can to prevent it. They are recapitalising the banks, cutting interest rates, putting spending money into the hands of pension fund managers by buying their bonds, giving £2,000 to consumers to go and buy cars AND helping the same poor consumers buy a house through the HomeBuy Direct scheme.

It's all inflation-stoking and the real question is when, not if, it will take hold.

What to do when inflationkicks in

When thinking about how to protect your wealth and profit from this coming storm, first think of the consistent hallmarks of a high inflationary environment:

Food, petrol and your energy bills all get more expensive. The interest rates tend to shoot up as well.

To address rising asset prices, invest in stocks and hard assets like gold. Stocks are a good counterweight to inflation as they have the potential to appreciate in value greater than the rate of inflation. Meanwhile gold is a true store of wealth that is not devalued by inflation.

And with rising interest rates the Bank of England's conventional monetary response to high inflation you would do well to sell any bond holdings you may have. Receiving a fixed rate of interest is not wise when the official base rate rises. It makes bonds less and less attractive. Conversely it makes having a low fixed-rate mortgage more attractive, but I'm not here to gloat.

Of course, property is also considered to be a good inflation hedge. Here's hoping

Theo Casey is Investment Director of The Fleet Street Letter. Theo is currently putting together a comprehensive anti-inflation strategy. Find out more about The Fleet Street Letter here