Inflation is still one of the biggest threats to your personal finances

Central bankers and economists insist inflation will be gone by next year. We're not so sure, says Merryn Somerset Webb. So if you haven’t started to inflation-proof your portfolio, you might want to do so. 

Gas prices are up, oil prices are up, food prices are up. If you’ve noticed all this you aren’t alone; the Bank of England sees inflation hitting 4% by the end of the year and in a recent survey from Interactive Investor, 84% of people said they have noticed prices rising and 55% (quite rightly) view rising inflation as one of the biggest threats to their personal finances (the other 45% clearly aren’t concentrating…).

The key thing to know then is whether our current inflation is transitory or not. Central bankers insist it will be gone by next year – most economists agree. For them the supply crunches – of everything from semi-conductors to gas to workers – are merely due to post-pandemic reopening pressures. They will work their way through the system (quite quickly) and that will be that. 

They might be right – and, barring the fact that we would like to see wages rising, we mostly hope they are. However, we aren’t sure at all that they are right. And we aren’t altogether sure they are sure either – the inflation numbers have surprised on the upside just a few too many times for comfort. With monetary policy still very loose, the labour market very tight and pressure on governments to keep spending up, we wouldn’t be surprised if they kept doing so. So if you haven’t started to try to inflation-proof your portfolio you might want to do so. 

Possibly the most straightforward way to do this, says GMO’s James Montier, is to think of it not in terms of trying to track inflation (via index-linked gilts, say), but to look instead for a store of value that will preserve your purchasing power over the long term. For him, that’s equities – they aren’t a hedge against inflation as such (prices could fall), but “they are the businesses that charge prices and pay wages, so their cash flows should be real if these two elements are roughly matched, and thus they act as a store of value in the longer term”. That said, there is something better than just equities – “cheap equities”. Find these and you will effectively be getting your “inflation insurance at a discount”. 

Andrew Williams of Schroders mostly agrees: equities offer “decent protection” against inflation, he says (although anyone trying to build wealth in the 1970s will remember it as a struggle). But a far better predictor of performance than inflation levels is still starting valuations. Good news then that “valuation dispersion... that is, the gap in fundamental valuation between the most and the least highly rated shares –  remains at extreme levels”. So buy value stocks. And that cheap insurance you need? It’s very much available. In this week's magazine, we look at the UK market. And this week’s podcast is with top value investor Gary Channon (moneyweek.com/podcasts). We also look at an investment trust invested in Canada with some energy exposure and a strong income focus.

Interactive Investor has an idea for its worried clients: the Capital Gearing Trust (LSE: CGT), which we like too. This has two objectives: to preserve capital over any 12-month period and to deliver returns well in excess of inflation over the long run. Both good. Finally, Investec suggests JP Morgan Global Core Real Assets Trust (LSE: JARA). It is heavily invested in real estate, infrastructure and transportation, all of which should give some inflation protection. The yield is around 4.5% – buy now and hopefully even if inflation hits 4%, you will still be making a real yield (just).

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