Four ways to stay ahead of inflation

03 November 2022

4 minute read

Often labelled the ‘silent assassin of savings’, inflation represents a hike in the cost of everyday living and the higher it rises, the less your cash will be ultimately worth.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • What is inflation?
  • What impact can it have on savings?
  • How you might invest, if you want a better return, provided that you are prepared to accept the risk of loss.

The rate of inflation rose by 10.1% in the 12 months to September 2022, up from 9.9% in August and returning to July’s 40-year high1.

The rise in the cost of living is mainly due to food prices2.

The problem for savers is that higher inflation means their money is ultimately worth less.

So, when inflation is rising, those who save into deposit accounts may look to redirect their money into investments to get potentially better return. Even with interest rates rising, the returns still won’t keep up with inflation.

You need to be willing to take on more risk, however, as unlike cash bank accounts, investments can fall as well as rise and you could get back less than you invest, or lower returns than you might otherwise have achieved.

Here are some investment strategies to consider for trying to stay ahead of inflation over the longer-term.

Invest in the stock market

An inflationary backdrop can benefit investors because during such periods companies will often increase their product prices when their underlying costs start to rise. As a result, company earnings may have the potential to keep up with inflation, yet there is no guarantee.

While shares offer growth potential, they can be risky. Opting for a fund which invests in a wide spread of stocks is less risky than putting your money into just a handful of shares. When you invest in a fund, your and other investors’ money is pooled together. A fund manager then buys, holds and sells investments on your behalf.

Funds can invest in companies in the UK or globally to give you exposure to regions such as Asia, America and Latin America as well as markets closer to home in Europe. You can check out the Barclays Funds List which helps narrow down the huge range of funds available.

Alternatively you could invest in a low-cost tracker fund, which will simply mirror the performance of a particular index, such as the UK’s FTSE 100.

If you are considering investing in the stock market using shares or funds, remember that the value of your investment can fall as well as rise and you could get back less than you invest.

Find out more about funds

Invest in property

Real estate and property in general, is known for typically staying ahead of the cost of living over the long term. But while buying a property outright is quite an elaborate step to take to beat inflation, you can still access the asset class by going for a fund which invests directly in bricks and mortar. This can be risky, however, as if you are a homeowner you already have exposure to the residential property market.

By doing so it helps you to not only diversify your portfolio away from just bonds and shares but also spread your money across a broad range of properties, such as office buildings as well as industrial and retail parks.

This can help with diversification by ensuring that if one or more buildings are unoccupied for a period of time, the other properties can still generate income. The rents paid by tenants, which are often linked to inflation, can provide a stable and sometimes rising income while over time, property values could potentially appreciate.

However, commercial property prices can be volatile and when the economic backdrop becomes uncertain many buildings may fail to attract a sufficient number of tenants or tenants could become solvent and default on rents, which means values and investment returns are very likely to fall. While the demand for space has been impacted by the pandemic and the shift to work from home more, some might want to consider it as part of their long-term investment strategy.

In addition, it is vital to remember that property is an illiquid asset, in other words it cannot be sold quickly. This means that if values start to fall and investors try to get their money out en masse, fund management groups can impose so-called ‘lock-in’ periods, which means you will have to wait until the firm sells some of its assets before you can get your money back.

Consider commodities

Commodities can often be viewed as a hedge against the rising cost of living. When an economy is expanding, consumers and corporations are generally financially better off and as a result they typically spend more.

In such an environment, supplies can be squeezed and companies start charging more for their services and goods, including raw materials and commodities. For example, when the price of oil rises, the cost of petrol and diesel on the forecourts follows suit. But commodity prices can be highly volatile and investing in the asset class is not for the risk averse.

If you are considering putting some money into commodities, consider exchange-traded funds (ETFs), which track the price of both individual as well as baskets of commodities. In addition, there is no shortage of actively managed funds, which invest in shares of commodity and commodity related firms.

Find out more about what impact inflation and deflation can have on your investments

Invest using a tax-efficient wrapper

It’s not just how you invest your money that can help combat inflation, but the investment vehicle you use. Investing via a pension or stocks and shares ISA means you don’t pay tax on your returns. With pensions, you get tax relief from the government, boosting your investments immediately, but you can’t touch your money until you reach 55 (57 from 2028). Meanwhile a stocks and shares ISA is a good choice for investing as it allows easy access.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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