Inflation rising from 1.5% to 2.1% recently made headlines and it is widely expected to continue rising for the next few months before reducing later in the year.
🦠 There has been a surge in economic activity as pent-up demand is met, economies gradually reopen, and consumers go out and spend. Rising prices is a natural result.
Since 2008 we’ve got used to low inflation in the 1-3% range but I think 4-5% inflation could easily be seen at certain times later this decade.
Factors suppressing inflation in the last decade may well run out; the pool of cheap Chinese labour will start to run low, and more production could easily be brought back home rather than imported. Governments are so indebted they might accidentally on purpose welcome a bit of inflation too.
🐡 Inflation is the silent killer. It’s there but you just can’t see it. Prices rise bit by bit and you barely notice.
🏘️ The best example is house prices. If you’re saving for a deposit on your first house, you’ll earn pretty much zero interest on your savings and as house prices rise, you’ll feel further away from property ownership unless you keep adding more and more to your savings each month.
🍺 Here’s another: when I was at university in the mid to late 90s, we used to call a £2 coin a “beer token”, i.e. a pint of beer was £2. The last pint I bought was £4.75!
❓ How do you protect yourself from inflation?
🙋 If you can afford to take the risk, invest, and don’t have too much cash.
📈 Historically the global stock markets have always trounced inflation over the medium to long-term.
📈📉 Sure, there have been bumps along the way, markets and inflation ebb and flow, always have done, always will do. But the more you can beat inflation by investing in the global stock markets early on, the less it will matter later when you want to take less risk.
💷 There is currently £236billion languishing in bank accounts earning zero interest. And of the 13 million ISAs opened in 2019-20, 9 million (more than two-thirds) were Cash ISAs, surely earning next to zero interest as well.
💷 No doubt there are untold £millions in cash in Child Trust Funds and Junior ISAs too. I’m not amongst them – my children have CTFs and they’ve both been invested in the global stock markets for 15 and 13 years and, to date, done very well because of that.
🥺 The Financial Conduct Authority’s recent research showed that lots of people are taking advantage of pension freedoms by keeping their pension invested and drawing capital from it gradually, but most of these are not taking enough risk, lots of them are sat in cash, and inflation will slowly but surely erode values here as well.
✅ Have I made the point yet? If you can afford the risk and have sufficient time horizon, invest, and don’t sit on more cash than you must. Ideally, start investing early and keep going, keep going and keep going.