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.

When we invited investors to put their questions about markets to us recently, one theme above all stood out - inflation.

Concerns about price rises dominated the queries we received in advance of our latest Quarterly Investment Outlook, which is published this week. In the main, the concern was how investors can build portfolios to keep pace with price rises with investors eager to know the likely winners and losers from a surge in inflation.

And that surge appears to be gathering pace after the UK today confirmed the headline measure of inflation, the Consumer Prices Index, rose to 2.5% in June. Just yesterday the US confirmed prices are rising even more quickly over there at 5.4%, the fastest growth for 13 years.

Inflation has not been something to trouble us for several years now. You have to go all the way back to 2011 to find UK inflation above 5%. The level today is half that, so some perspective is needed when viewing current levels of price rises.

But, for investors, it is certainly sensible to keep a watchful eye on inflation. Our Investment Outlook published this week includes the statistic that: “Prices rising at just 4% a year will cut your purchasing power in half in only 18 years. An early retiree with health on their side might find that every £100 of their starting pension pot is worth just £25 by the end. You need to have put aside a great deal for that not to matter.”

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Will inflation rise further from here to a level that begins to cause real pain for households? The signs are that it still has more to go, and the Bank of England has forecast the headline rate to rise above 3% this year, before falling back again.

It’s the Bank’s job to keep inflation under control and any sign that inflation will overshoot estimates could force interest-rate setters to bring forward measures to slow the economy and spending down. Ultimately, that can mean rises in interest rates but may also include a lowering of targets for asset purchases by the Bank. Markets have shown themselves to be very skittish about any potential tightening of policy.

We should remember that extra asset purchases and a rate cut to 0.1% were enacted as emergency measures last year to cope with the pandemic. They were made at times when we did not yet know how deep the impact from Covid-19 would be, or even if we would get effective vaccines to help end the crisis. Now that there seems a route out of the pandemic, the Bank could decide these measures should be reversed.

For investors, the best approach is to cover all eventualities by making sure they are well exposed to both the reflation trade - value, cyclicals and commodities - as well as those more defensive names. Being well diversified is the best option.

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. 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 a Fidelity adviser or an authorised financial adviser of your choice.

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