Four ways to protect your money from inflation

Put simply, inflation is when prices rise and things cost more than they used to. If your savings don’t keep pace with inflation (for example, if they are in an account with an interest rate return that is lower than the rate of inflation), your money will buy less over time, effectively decreasing in value.

It’s been a while since we’ve had to worry about this in the UK. Price growth was 5.2% year-on-year back in September 2011 but had slumped to -0.1% last September (meaning prices had actually fallen compared to the previous year).

Yesterday, however, inflation hit its highest level in 15 months, coming in at 0.5% in the year to March. The rate has been steadily increasing since October. If we do vote to leave the European Union in the Brexit referendum, sterling is predicted to depreciate considerably. This could cause quite dramatic price rises.

So is now the time to start inflation-proofing your savings? Here are four different ways to combat inflation and eight funds that could do the job for you.

1) Pick the right asset class

Real assets, like gold and property, as well as their related shares, generally do well in periods of higher inflation. Gold, especially, is commonly used but hard for small investors to hold in any form other than jewellery. So a fund like BlackRock Gold & General is worthy of consideration.

When it comes to property it’s an imperfect, but partial, hedge: rents in Europe are index-linked and in the UK rent reviews are upward only, and wage inflation makes increases possible. I like F&C Real Estate Securities.

2) Be specific

There are some companies that do better than others in inflationary environments. Cash generation provides a buffer for a company, enabling it to self-fund its operations through tougher times. And pricing power is particularly important, as the company will be better able to offset rising costs by passing them on to customers.

Evenlode Income invests in some such companies: Procter & Gamble and Sage. Infrastructure is also a good bet, as toll roads, for example, have prices linked to inflation. You could consider First State Global Listed Infrastructure.

3) Avoid bonds

Inflation is also usually the enemy of bonds. Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation can be a problem, as it erodes the real return you receive.

To mitigate this risk you could invest in a fund like AXA Sterling Credit Short Duration Bond, which only invests in bonds close to maturity.

4) Let the professionals take the lead

There are a number of multi-asset funds that are currently being tactical about possible inflation. These include Schroder MM Diversity, which doesn’t own fixed income or bond proxy equities, and Investec Cautious Managed, which has investments in physical gold and silver and UK and US index-linked government bonds.

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.