Investing to protect against inflation

The UK inflation rate has risen by 0.5% from May’s 0.3% according to the latest Consumer Prices Index (CPI) numbers.

Investing to protect against inflation

This comes as airfares in Europe rose a record  10.9%, and other transport costs rose as the low oil price begins to work through the system.

Transport was the main driver of the 0.5% rise in inflation followed by Recreation & Culture which saw a 0.6% rise, primarily driven by computer game costs. The Retail Price Index rose 0.2% to 1.6%.

The pound is down nearly 20% against the euro and 18% against the US dollar.  Most of that fall occurred after the EU Referendum and doesn’t factor into June’s inflation calculations.  A weaker currency will mean more expensive imports.

It is not just the US and Europe, the pound is also down 8.8% against the Chinese Yuan, a currency which the Chinese Government has been devaluing against the US dollar in order to make their exports cheaper.

The inflationary effect of a weak pound can already been seen in the oil price. In US dollar terms a barrel of Brent crude is down -5.6%, whilst in sterling terms it has risen 5.6%.  So in the UK we are now paying more for a barrel of oil than the before the Referendum. The fall in the value of sterling will affect all goods and services which the UK imports.

Adrian Lowcock, head of investing, AXA Wealth, said: “Much of the developed world is concerning itself with the risk of deflation and compared to that having some inflation even if it is growing is the lesser of the two evils.

“However the impact of a weak pound on inflation is only temporary – once the pound finds a new level and stabilizes its effects will start to work out of the system. We still lack the necessary wage inflation which will help boost consumer spending, company investment and growth.

“Even at low levels inflation is insidious and erodes the value of cash, so investing to protect against inflation is an important goal for any investor as it means you retain the spending power of your money. Whilst medium term the inflation outlook remains unclear, we would expect it to rise over the next year as the weak pound and the recovering oil price drive prices higher.”

Lowcock gives three investment ideas to protect against inflation:

CF Woodford Equity Income – The fund has a large exposure to tobacco and pharmaceuticals, two areas where demand is not particularly sensitive to rises in prices caused by inflation. In addition the earnings from these sectors are largely in US dollars so the companies Woodford invests in will benefit from the fall in the pound.

Lindsell Train Global Equity –  Manager Nick Train invests in companies which have strong brands and pricing power, the sort of businesses which will be around in 10 or 20 years’ time. He has a bias towards consumer staples businesses. These companies sell goods which households need and are therefore less sensitive to rising prices.  The global exposure of the fund also reduces the impact of events in the UK will have on those businesses.

M&G UK Inflation Linked Corporate Bond – Manager Ben Lord creates a synthetic portfolio of corporate bonds which behave in a similar way to inflation-linked bonds.  He uses government bonds and derivatives because there is a limited choice of inflation-linked corporate bonds. This approach does give the manager the ability to adjust the funds sensitivity to inflation, and risk. The fund yields 1.73% at present.


Please remember, no news or research item is a recommendation to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest.


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