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A guide on how investors can protect against inflation

We share inflation-proofing ideas for equities, funds and trusts for investors looking to add protection to their portfolios.

8th July 2021 11:12 by Faith Glasgow from interactive investor

After a decade largely out of the limelight, inflation is back on investors’ radars. UK consumer prices index (CPI) inflation leapt from 1.5% in April to 2.1% in May – above expectations, and the Bank of England’s target 2% rate.

It’s hardly surprising that prices are rising, given the financial pressures on businesses as they attempt to open up after more than a year of disruption. As Rob Burgeman, senior investment manager at Brewin Dolphin, explains: “Restaurants, for example, are likely to open with reduced capacity, with a huge demand and with debts that need repaying. So prices are almost certain to rise.”

This is likely to be relatively transitory, as the economy feels its way back towards something like normality. However, for Darius McDermott, managing director of fund research firm FundCalibre, the US Federal Reserve’s recent move to increase inflation expectations for this year and bring forward its time frame for interest rate hikes to 2023 is noteworthy.

“We feel inflation could be slightly more embedded in markets than we thought it was earlier in the year,” McDermott comments.

An element of inflation can work to investors’ advantage, but the key difficulty is that rising prices erode the purchasing power of your money. So where can you invest to protect against such erosion?

“Ideally, what you need in an inflationary environment are either assets with built-in inflationary protection – index-linked bonds, some property, many infrastructure contracts and the like – or equities; but specifically stocks that have pricing power and can therefore pass cost inflation on to their customers without this impacting revenue,” explains James Carthew, head of investment companies at QuotedData.

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