How to Invest against Inflation amid Low Interest Rates

Article excerpt

Byline: TREVOR LAW

Many people may have paid a high price for taking too much advantage of the credit boom years. But the recent economic climate has hardly encouraged people to save more and borrow less.

On Tuesday, it was announced that the Government's official rate of inflation guide, the Consumer Price Index (CPI), had risen to 3.7 per cent in December compared to the 3.3 per cent in November. And what many deem to be the more accurate Retail Price Index (RPI), which includes mortgage payments, was a rather higher 4.8 per cent for last month, a small increase on the 4.7 per cent November figure.

Inflation figures have now remained above the two per cent target by one percentage point or more for 13 months now.

This makes it increasingly difficult for Britain's savers with the average instant access savings account providing 0.81 per cent. This is a consequence of the Bank of England base rate remaining at 0.5 per cent, which it has done since March 2009.

Going back to basic economics, inflation is a general and progressive increase in the price of goods. The rate is important as it represents the real rate at which your investment grows and erodes and the potential loss in spending power over the years.

Inflation can be a useful tool and can also show us what return we need to keep pace with our standard of living over time. To take a simple example, if a loaf of bread was pounds 1.50 this year and inflation is at 10 per cent then we know that next year that same loaf of bread will cost pounds 1.65 if the inflation rate average is matched. Therefore the purchasing power of our money has changed significantly.

So for those who often draw the interest from their saving to generate additional income or have fixed income securities, you should pay attention to inflation rates.

A high inflation rate can erode the real value of the income you receive and jeopardize any fixed income stream on which you may be counting.

To combat this risk, you may want to consider index-linked gilts (Government stocks) that remain a popular method of mitigating inflation. But be wary if and when interest rates rise, at which point equities may be a more favourable to combat against inflation. …