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Protecting investments from jumping inflation
Last December, the Consumer Price Index (CPI) took the biggest leap since records began – rising to 2.9 percent – with a possible knock on effect on savings, mortgages and pensions.
Should interest rates rise to combat inflation, this will have an immediate effect on mortgage rates. While opinion is divided on when any increase will happen and, consequently, the best time to consider a fixed-rate mortgage, higher interest rates could also see more houses repossessed, killing off the current recovery in the property market.
To combat the potential effect of inflation on savings, you should make the most of your tax-free allowances and ensure that money is in an account which provides healthy returns.
Investors should also consider diversifying their portfolio to include assets which are less vulnerable to inflation erosion. Cash and gilts are particularly susceptible, while rental and company income, as well as equity income funds, are likely to provide returns in line with or above inflation. Gold also tends to retain its value over time.
Those approaching retirement could consider index-linked annuities or unsecured pensions as protection against inflation, although these products will involve additional expense and risk.
