Inflation could cost cash savers 8% over three years

Darius McDermott 12/09/2017 in Multi-Asset

With inflation now almost 3%* and cash savings rates languishing near zero, the value of our money is being eroded at its fastest rate for some time. If inflation continues at this rate for the next three years, £1000 in a cash savings account could be worth as little as £920. That’s an 8% fall in value of a ‘safe’ asset.

Here are three ways to invest to beat inflation:

1.Search for a higher yield

Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation poses a problem because it erodes the real return you receive – just like cash. To mitigate this risk there are two options: either invest in a fund such as AXA Sterling Credit Short Duration Bond, which only invests in bonds close to maturity, or find a bond fund that pays a high enough yield to provide a cushion. Schroder High Yield Opportunities, which has a yield of 6.18%** and TwentyFour Dynamic Bond, which invests across the fixed income market and currently has a 4.76% yield** are worth a look.

2. Inflation-proof your investments

Some companies do better than others in inflationary environments. Cash generation and pricing power can provide a buffer for a company, enabling it to self-fund its operations and offset rising costs by passing them on to customers. Evenlode Income invests in companies with these characteristics. Infrastructure is another good option. Assets owned by infrastructure funds, such as toll roads, have pricing that is linked to inflation. Here, you could consider First Sentier Global Listed Infrastructure.

3.Go all-out for UK equities

Alternatively, you could just decide to place your faith in UK plc. Fidelity Enhanced Income has a yield of 6.35%, while City of London Investment Trust has a yield of 3.91% and a fantastic record of raising dividends over more than 50 years. As we start to extricate ourselves from Europe, volatility is likely to rise – which could create opportunities for talented stock-pickers.

*UK inflation, as measured by CPI rose to 2.9% in August 2017, according to the Office of national Statistics.

**Source: FE Analytics as at 12 September 2016

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. 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.Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.

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