This currency-led inflation has certainly been a noteworthy feature of the first of this year’s two bumper reporting seasons; numerous companies have pointed to the rising cost of imported goods, and – given wage growth is yet to feature strongly in the inflation figures – the difficulties in passing it on to customers. Retailers and restaurants are in a particularly tight spot, as are those that supply them with finished goods or ingredients – tensions throughout this supply chain are running high, as the spat between Tesco and Unilever, and now Heineken, has brought into focus. Investors will need to identify who will win out and be able to protect their profit margins most effectively.
For savers and investors, the effect of rising inflation is perhaps even more pronounced than rising prices. According to Moneyfacts – who supply the savings rate information you can find on our website - there is now just one savings account out of 793 available that matches or beats inflation. While this picture could hardly be any worse, it’s unlikely to get any better, either – few expect the Bank of England to follow the Fed’s lead and raise rates any time soon, partly because the property- and consumer-driven nature of the UK economy makes it less able to absorb such increases. Banks, already seeing a squeeze on net interest margins, therefore have little incentive or ability to offer higher savings rates.
Of course, this problem is more pronounced for the wider public than readers of Investors Chronicle, more accustomed to seeking out decent income bearing assets as you are. Yet you are not entirely immune – many investors, looking at the rather frothy markets, are opting to sit on higher levels of cash than normal, the value of which is now being eroded more quickly. There are other, more everyday reasons for holding cash, like care home liabilities as seen in this week’s portfolio clinic. Those of you who have opted for fixed income to plug the gap now face the prospect of capital erosion, and the same is true of bond-like equities, which, as Mr Bearbull points out this week, have risen to logic-defying valuations as the hunt for yield has widened.
The one glimmer of hope is that this inflationary spike is merely temporary, and will wash out as oil prices retreat and sterling stabilises. It is, however, just a glimmer – the Bank of England reckons inflation will hit 3 per cent this year and remain above target until mid-2019, time enough to do much damage to poorly-protected portfolios.
