Inflation: what investors need to know

interactive investor comments on latest UK inflation figures and key considerations for investors.

• Myron Jobson, Personal Finance Campaigner, interactive investor comments on UK house price inflation.

Inflation fears both at home and abroad continue to hit stock markets, with the FTSE 100 sliding beyond 1% today as official data showed UK inflation spiked in April.

Dzmitry Lipsky, Head of Fund Research, interactive investor, says: “‘How do I shield my portfolio from inflation fears?’ is a burning question for many investors.

“Commodities are traditional inflation hedges, and while they have struggled for performance for at least a decade, there has been improvement in sentiment towards the asset on the back of structural long-term trends. This includes economic recovery from the pandemic as well as infrastructure spending and hence higher demand for materials. In addition, the cyclical nature of commodities and the current point in the market cycle might be an attractive entry opportunity.

“It is generally accepted that gold could also be used as an inflation hedge and, therefore, rising inflation is necessary for the cost of gold to increase. That's because gold is priced in US dollars, so when each dollar becomes less valuable it takes more of them to buy the same amount of gold. Conversely, low inflation and a strengthening US dollar should be seen as negative for gold prices.

“Index-linked government bonds are another option. We like Capital Gearing (LSE:CGT) trust for exposure to this asset. The portfolio also has a big emphasis on index-linked government bonds, which account for around 30%. Such bonds offer protection when stock markets fall, as well as providing a shield against inflation.

“Inflation is at low levels, but the prevailing sentiment is that it will elevate in the years to come, in part due to the huge government borrowing that has taken place in response to the Covid-19 pandemic. Don’t fill your portfolio with highly specialist funds. Equities still offer the most growth potential over the longer term and historically provide returns that beat inflation. Rising prices can mean more profit for companies, which in turn boosts share prices but over the long term.”

Richard Hunter, Head of Markets, interactive investor, says: “Inflation is also in focus having risen to 1.5% in April, compared with 0.7% in March. Set against the falling prices of a year ago, the move is unsurprising, while the recent strength of sterling will provide some support in containing the number as it should lower import prices.

“The figure remains within the Bank of England’s 2% target, but is expected to rise to perhaps 2.5% by the end of the year as comparisons harden, with a stronger oil price and the removal of some tax benefits adding to pricing pressure. When this has washed through, it is anticipated that inflation will settle again to the target level, which is of some solace to investors fearing overheating in developed economies.

“Meanwhile, the inflation debate continues to underpin the FTSE 100, which remains ahead by almost 8% in the year to date, given the preponderance of cyclical stocks in the index and warming international sentiment on valuation grounds.”

House price inflation

Commenting on the UK house price index, Myron Jobson, Personal Finance Campaigner, interactive investor, says: “The cogs in the housing market that virtually ground to a complete halt at the height of the pandemic appear to be running on overdrive, with house prices increasing by over 10% over the year to March 2021 – up 9.2% in February 2021.

“The government's decision to extended stamp duty relief on property purchases until the end of June has created a false economy favouring sellers, as buyers rush to take advantage of the initiative before it expires. The danger for buyers is paying well over the odds, and they are perhaps better off waiting until the stamp duty holiday ends rather than buying in an overheated market.”

Key points:

• The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 1.6% in the 12 months to April 2021, up from 1.0% growth to March.
• The largest upward contributions to the CPIH 12-month inflation rate came from housing and household services (0.57 percentage points), and transport (0.56 percentage points).
• On a monthly basis, the CPIH rose by 0.7% in April 2021, following a 0.2% increase in March 2021.
• Rising household utility, clothing, and motor fuel prices made the largest upward contributions to CPIH growth in April 2021; these were partially offset by a large downward contribution from recreation and culture.
• UK average house prices increased by 10.2% over the year to March 2021, up from 9.2% in February 2021; this is the highest annual growth rate the UK has seen since August 2007.
• Average house prices increased over the year in England to £275,000 (10.2%), in Wales to £185,000 (11.0%), in Scotland to £167,000 (10.6%) and in Northern Ireland to £149,000 (6.0%).
• London continues to be the region with the lowest annual growth (3.7%) for the fourth consecutive month.