How to position your portfolio for higher inflation

UK inflation hit 6.2% this week, Merryn Somerset-Webb explains what is behind it and how investors can position themselves to combat it.

If the chancellor wasn’t worried about his spring statement on Tuesday night, I think we can be pretty sure that he was very worried indeed by 7.01am on Wednesday morning. At 7am, the Office for National Statistics released the UK’s latest inflation numbers.

Thanks mostly to rising energy and fuel prices, UK inflation (as measured by the consumer price index) hit 6.2%, a 30-year high. The retail price index (RPI), the old measure, is rising at 8.2%. A reminder: the Bank of England inflation target (hitting it is its main job) is 2%. The worst, as Rishi Sunak knows, is yet to come.

There is a view in the UK that there are elements of Brexit in this. There aren’t (EU-wide inflation is also 6.2%). This is about war (which always brings inflation) turboboosting an inflationary environment created by the money printing and supply disruptions of the pandemic (we spent £400bn on pandemic policy costs) meeting the energy supply constraints created by the drive to net zero.

Energy prices look set to rise by well over 10% this month and food prices have surged, too. The Bank of England now expects inflation to peak at 8%-plus. That makes double figures almost a given.

A genuine crisis

Here, then, is a genuine cost of living crisis. Sunak, who has presided over a rise in the UK tax burden equivalent to 2% of GDP, would have eaten breakfast over a pile of newspapers jammed with demands about the many somethings to be done. He was told to raise the National Insurance (NI) threshold to protect lower earners; to delay or abolish the pending 1.25 percentage point rise in NI; to postpone the freezing of income tax allowances (a tax rise by any other name); to abolish the £70 about to hit household bills to pay for compensating energy companies that have gone bust; to bring forward the rise in benefits to reflect the sharp rise in inflation (low income households cannot be expected to cope with RPI at 8.2% without some immediate assistance); and to reduce fuel duty. He could, said almost everyone, one way or another, make the pain go away.

But of course in the end he could not. Those who wanted the NI threshold to rise got what they wanted – and it is a neat way to protect some lower earners. The fuel duty cut will please some, too – but given the volatility in energy prices, it is more symbolic than anything else. Overall he had no real rabbits in his hat. And with growth likely to slow into rising inflation, he is unlikely to find any.

In short, the government cannot protect you from this financial mess. You have to do that yourself. So stay in work if you can. In times of inflation you need as many income streams as possible, and if we are entering a period in which some power returns to labour, the returns to capital will surely fall – so best to have earned income as well as unearned. When it comes to the latter, choose wisely.

Few fund managers have been preparing for inflation (the transitory story was far too easy for them to work with). Look for those that have (our podcast this week with Charlotte Yonge of Troy Asset Management is a useful start) – and make sure you own some of them. It isn’t too late to prepare. Think Personal Assets Trust, Capital Gearing, Ruffer, BH Macro and JP Morgan Core Real Assets for starters.

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