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The inflation conundrum

In the new normal, rules have been bent, and points of reference that helped investors find their way discarded. The Institute of Fiscal Studies is even trying to persuade us that the time to start investing for your pension is in your 50s, “not your hard-up youth” (my mind might not be fully made up on everything else but I’m definitely not buying that).

So should we really expect everyone to be in agreement that we are now falling from the coronavirus pan straight into an inflationary fire? Not a chance.

Regardless of higher energy prices and global chip shortages, it is an entirely obvious link to make that when you drop billions of pounds (getting on for £900bn in the UK) into the system, you will inevitably stoke inflation. There’s plenty of evidence that prices are rising – inflation is creeping up in the UK and soaring in the US, and yet at the same time a chorus of experts, including Chris Dillow on page 16, continue to reassure us there's nothing to worry about. In a Treasury Committee evidence session this week, the Bank of England agreed the signs of inflation are real but insists these are not going to be sustained. It reckons CPI inflation will rise temporarily above the 2 per cent target towards the end of 2021, owing mainly to developments in energy prices, but that these won’t have implications beyond that and inflation will return to around 2 per cent over the medium term. Hence the Bank’s decision this month to stick to its QE schedule. Like the Fed, its priority right now is keeping markets steady and economic recovery on track. In any case, says the Bank, it has the tools and the ability to ensure that inflation goes back to the 2 per cent target on a sustained basis, but it underlined that there would be quite a lot of conditions to get through before it would even consider applying "modest" monetary tightening.

Andy Haldane was the only Monetary Policy Committee member to dissent, urging the bank to truncate the latest QE tranche by £50bn because he fears there is a risk inflation will prove to be persistent.

It’s a hugely important question for investors. Rising prices (the current UK reading is just 1.5 per cent but runaway inflation is within living memory, having hit 24 per cent in 1975) are terrible for the retired (and if you want to buy protection just look at how annuity prices compare when they offer inflation protection), and anyone at the mercy of interest rates such as mortgage holders.

Soaring inflation is far from being a certainty but investors might be wise to start building in some protection to their planning and investments. Just in case.