Inflation may be the new normal for savers and investors

17th February 2013

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The BBC’s economics correspondent Stephanie Flanders headlined a recent article on the Bank of England’s inflation report press conference as ‘Mervyn King still ne regrette rien’.
Flanders noted that the Bank of England’s inflation target is not just going to stay above inflation – it is going to be above 2.5 per cent for around 18 months – and it may break three per cent or more.

She writes: “The big lesson for right now from the inflation report and the press conference is that inflation is going to stay higher for longer”.

The Governor is effectively saying that a raised rate of inflation – certainly by the standards of this century – is going to be a fact of life for some considerable period of time to come.

There is little that individuals can do to change this national picture. You can’t, for example, remove the impact of energy prices, rail fares or tuition fees from the overall numbers. But you do face your own particular inflation. The Office for National Statistics calculates the consumer price index and retail price index from a basket of goods and services in slightly different ways resulting, usually, in a higher rate of RPI. It is unlikely that is your inflation exactly matches either, just as average families have never had 2.2 children. Yet you may be in a group that is particularly affected.

In the last couple of years, pensioners were certainly more affected by higher food and commodity prices. Indeed Mindful Money has reported on calls for the ONS to create an index specifically for pensioners for upgrading the state pension and other benefits and credits.

But whatever the public policy decisions, the big question for savers and investors is what can be done to mitigate the impact of inflation. It helps, for example, to make sure your savings are attracting the best interest rates and not falling prey to some banks offering teaser rates on savings products in year one which are then cut back in subsequent years. Websites such as Savingschampion can help you keep an eye on those savings rates.

There are other inflation coping strategies such as investing in National Savings & Investments products though availability can vary depending on the Government policy.

You may decide to move your portfolio into arguably riskier assets or adapt it to include more explicit inflation proofing. If you have an adviser and are concerned about inflation and its erosive effects, it may be worth getting in contact with them. Another increasingly popular option is to buy the bonds of single companies which can offer very generous rates, though you will be concentrating the risk to your capital. While we can’t offer specific help, we can give you information about the range of options and crucially what the associated risks may be.

But in the next few months, Mindful Money will be considering all of these options and strategies to give you as much information as possible to proof you against this stubborn rate of inflation, which, unfortunately the Governor seems quite relaxed about.

9 thoughts on “Inflation may be the new normal for savers and investors”

  1. Anonymous says:

    Hi Shaun,

    You mention Australia – the picture looks bad, with housing affordability problems, qantas losing money and their car industry falling apart.

    1. Andy Zarse says:

      I have some friends over there on holiday just now. The cost of almost everything is apparently eye-wateringly expensive.

      1. Anonymous says:

        Yes, the currency is painfully strong – similar to the CHF hurting the Swiss economy.

        However if they did manage to lower AUD, that would make houses more affordable for foreigners including rich Chinese to the detriment of the locals.

    2. Anonymous says:

      Hi Expat and Andy

      According to this video from today’s Sydney Morning Herald then the future is bright. Blue pill alert!

      http://media.smh.com.au/national/selections/no-the-resources-boom-isnt-over-5246752.html

      If only China planned twice as much building things would be even better… Oh wait a minute…

  2. dutch says:

    hot on the trail of the Chaori default-

    http://sg.news.yahoo.com/video/chaori-default-spell-reform-chinas-050731469.html

    ‘China’s broadest measure of new
    credit trailed analysts’ estimates as the government tries to
    rein in financial risks without causing economic growth to
    slow too much’
    http://www.businessweek.com/news/2014-03-10/china-s-credit-expansion-trails-estimates-amid-risks-of-slowdown

    1. Anonymous says:

      Hi Dutch

      Thanks for the links and yes it looks as though rough water is ahead for the Chinese economy and those who depend on it.

  3. Mike from Enfield says:

    Hi Shaun,
    I have personal experience of the Chinese fruit market and how its price and supply can be distorted by action of the state. When the Shanghai police tip off the roadside traders that they are going to crack down on dodgy goods, for the next week EVERYBODY is selling fruit instead. As you may imagine, competition is frantic!

    1. Anonymous says:

      Hi Mike

      That is intriguing. So presumably prices run quite a cycle of being pushed down and then as fruit selling becomes unviable and the police moves prices rise again?

      1. Mike from Enfield says:

        That sounds about right, though I should add that it seems to be on a pretty small geographic scale, certainly not city wide.

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