Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
UK inflation rose slightly over October to 0.7%, up from 0.5% for September. Though most analysts had expected the rate to stay flat at 0.5%, last month’s increase was due in large part to rises in the cost of clothing and food.
There’s good news and bad news here. Let’s get the bad out of the way first.
We shouldn’t get too carried away on the back of these figures. Yes, that 0.2% rise is slightly higher than expected, but inflation still remains at a historically low level, and sits well below the Bank of England’s 2% target.
All this reflects a disinflationary environment of low real wage growth and rising unemployment levels.
What’s more, the immediate situation in October, which today’s figures reflect, was more positive than what we’ve experienced so far over November. While infection levels continue to rise, the return to lockdown will only worsen unemployment levels and further reduce opportunities for spending.
The reality is that inflation is likely to remain subdued, and probably creep back down towards zero again as November takes its toll.
All this means that, for the time being at least, it’s more of the same for investors. With banks likely to keep interest rates low as a way to encourage inflation, savers will continue to find the meagre returns they can earn on cash deposits outpaced by inflation, even at its current level. Bond yields, meanwhile, will also stay low as investors look for alternative sources of interest, keeping high-growth stocks and dividend-paying shares looking attractive.
But there is good news too. We know that a vaccine is our best shot at ridding us of this virus - it may help cure our inflation woes too. The vaccine should ultimately reopen the economy and give prices the shot in the arm they’ve been looking for.
In the meantime, the good vaccine news combined with the increase on today’s figures, however slight, means that the Bank of England is unlikely to dip into negative interest rates. That’s good news for savers, for whom the prospect of even lower returns may have seemed mystifying.
But if the vaccine offers a light at the end of the tunnel when it comes to the virus, the situation is slightly less clear when it comes to inflation. We can’t be sure exactly how long that tunnel goes on for or where exactly the light will take us.
After being stuck in a disinflationary rut, rising inflation feels like a good thing. That’s true, but only to a certain extent. Nobody wants inflation to get out of hand - that’s why the Bank of England sets its 2% target. Too little and you curtail growth, too much and value is unduly eroded.
We often see a hefty rise in inflation following a recession. A repeat this time around may not come as a surprise. In fact, given the huge levels of debt the government has raked up this year, there’s concern that tax-rises alone won’t cut it and that a steep rise in inflation is inevitable as a way to offset those debts.
And there may be structural pressures too. In their new book, The Great Demographic Reversal, discussed yesterday in the Financial Times, Charles Goodhart and Manoj Pradhan predict that the demise of globalisation and an ageing global population will combine to create a surge in inflation over 2021, perhaps as high as 10%.
That’s by no means the consensus view, but today’s figures could nevertheless signal an opportunity for investors to consider whether their savings are protected against any rises. While it certainly makes sense to keep some money in cash for easy access, that money will struggle to keep up with today’s super-low level of inflation, let alone any increase.
For income seekers who are willing to take a step higher on the risk ladder, equities that pay dividends may be a good way to go, since company profits should grow roughly at the same rate as inflation. One option available on our Select 50 choice of favourite investments is the Invesco Global Equity Income fund. Alternatively, the ASI Global Inflation-Linked Bond Fund looks to offer bond investors protection when there is the expectation of rising inflation.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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