Three things you must do today to beat inflation

25th July, 2022.      //   General Interest, Market Intelligence, The End of Humanity  // 
cost of living crisis increase uk rising prices how to protect investments property savings pension rising inflation 2022 energy

Households are braced for a prolonged period of high inflation and further interest rate rises, after the Governor of the Bank of England warned Britain would face faster and steeper price rises than rival nations. Andrew Bailey has said he will act more “forcefully” to tackle persistently high inflation, which is already at 9.4pc – its highest for 40years – and forecast to pass 10pc later this year.

It likely means higher interest rates, which threaten to put yet further pressure on stock markets and hurt Isas and pensions. Meanwhile rising prices mean the buying power of cash deposits will drop faster.

 But there are still a few measures you can take to protect your finances. The Telegraph explains the best options to protect your cash from rampant inflation.

1. Change your investment strategy

Bond owners could suffer the most during a spell of prolonged inflation. Investors sell bonds – which pay a fixed return, or “coupon” – when inflation rises as it eats into the real value of that income. Higher inflation also increases the likelihood the Bank of England raises interest rates, as it has done, which would be bad news for bonds as it decreases the relative value of their payments versus newly-issued debt.

Investors should protect themselves by buying index-linked bonds, where interest paid rises in line with inflation.

Inflation, in moderation, is not necessarily bad for stocks, as some companies can pass costs onto consumers to balance out rising input costs. Those which have strong pricing power, such as utilities or large consumer brands, should be able to carry on with business as normal.

Oil and mining companies will also do well as rising commodity prices are good for their bottom lines. Utility groups often pay dividends linked to inflation.

However, inflation could be bad for retailers, such as supermarkets, which may lack the ability to increase prices.

Infrastructure and real estate investment trusts often have contracts linked to inflation, so their income and dividends would rise as inflation does. Gold could also rise in value. Supply is relatively fixed, so more money floating around the economy should increase what people are willing to pay.

2. Protect your retirement income

Inflation can have an enormous impact on how long retirement savings will last. Those with a basic “level” annuity will see their income eroded every year. Owners of an inflation-linked annuity will start off with a much smaller income, but one that keeps increasing over time.

If inflation rises even higher than the latest figure, as is expected, pension savers with a “defined contribution” pension will be forced to take on more risk to keep up.

Given recent market falls, savers must not take too much out of their pension pots. Taking more cash out of your investments to cover rising prices, as markets fall, compounds the loss and means you own fewer shares that can benefit from a rebound.

If drawing down a pension while prices are rising and markets are falling, savers should use their cash savings, and replenish these when markets have bounced back.

3. Avoid locking your cash savings away

Savers should benefit when higher inflation leads to the Bank of England increasing the Bank Rate. While rates are rising, they have not done so enough to come anywhere near inflation.

The best easy-access savings account, from Al Rayan Bank, only pays 1.6pc. On a balance of £50,000, this would earn just £800 a year.

Meanwhile fixed-rate deals have been rising at their fastest rate for a decade. The best one-year bond is now 2.75pc from Gatehouse, according to Moneyfacts. Locking in for two-to-five years can secure savers interest rates of more than 3.45pc at some providers.

However, with the Bank Rate expected to rise further and savings deals forecast to follow, experts have warned that locking in for too long now could mean savers will lose out on better options later on.

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