Inflation?

When Chancellor’s Business Development Manager, Dave Heaton, first started work at the end of the 1970s, high inflation was a fact of life – in 1979 the rate of inflation was in excess of 17%! It seemed to Dave that every year there was a substantial pay rise, but as he was yet to buy a house, his outgoings were low at the time so he did not really notice the rising prices for utilities and goods. It all seemed like good news. Back then, Dave recalls that on a holiday to The Isle of Man TT races in 1978, petrol was around 76p a gallon (not per litre!) and a pint of beer – at least on the island – was around 25p.

It is true to say that for many years, inflation in the UK has been at extremely low levels – but there are many stories in the media that this may be about to change.

How any rise in the rate of inflation would affect an individual very much depends upon their personal circumstances. Someone who is retired and in receipt of an index linked pension from, say, a public sector employer – plus a State pension, is likely to be affected less than someone who, for example, bought a fixed annuity from a Money Purchase pension scheme and hasn’t yet reached State Pension age. The UK State Pension is currently subject to the ‘triple lock’ ruling, which is a safeguard that currently ensures the State Pension does not lose value because of inflation.

There is no certainty, of course, that inflation will rise but it is probably true to say there is more likelihood of it rising than falling. Trying to anticipate a rise in inflation and invest accordingly is something that is difficult to get exactly right – even professional fund managers do not have a crystal ball!

History shows (but please bear in mind that past performance is not necessarily a guide to the future) that company shares (often referred to as equities) can be a good way to beat inflation given a medium to long term investment horizon, provided that the individual has an appropriate attitude to investment risk and volatility. Even then, equities should ideally form part of a “balanced” portfolio, which is professionally managed and comprises several different asset classes . This ensures that the asset allocation is reviewed on a regular basis by the fund manager, to anticipate factors such as a possible rise in the rate of inflation.

The Bank of England also reports that Household savings have risen substantially during the pandemic. This is understandable due to a variety of reasons such as people being unable to eat out, go on holiday and visit the shopping centre as much as they used to because of the lockdown rules. Holding cash as an “emergency fund” or buffer for short term expenditure is always recommended, but with UK interest rates at very low levels (the bank base rate is currently 0.1% per annum), holding large amounts of cash for longer terms is unlikely to be a sensible investment strategy. Even with the current rate of inflation, the buying power of cash is likely to reduce over time.

Chancellor’s Directors and Chartered Financial Planners can offer a holistic investment and financial planning service including cash flow forecasting, so if you feel that the time is right for an overall review, please do not hesitate to contact either Grant Farnell or David Torkington on 01204 526846.