How to survive an inflation shock
Kevin Godbold | Wednesday, 5th October, 2016
During September, Apple launched its latest iPhone model in Britain and raised the sterling price of the firm’s popular device by £60. Meanwhile, customers in the US will pay the same as last year for an iPhone.
This seems like an example of one of the negative effects for British consumers of the pound’s plunge against other currencies since the Brexit vote, and there could be much more of this kind of thing to come.
Higher inflation is on the way
The Bank of England (BoE) thinks higher inflation is on the way. An increase to 2% by the end of 2017 and 2.4% in late 2018 and 2019 is the central bank’s best guess — a big leap from today’s 0.6% or so and a forecast that represents the BoE’s highest ever medium-term inflation forecast.
How fast will other retailers be to follow Apple’s lead and raise prices for imported goods? Not all firms are rushing to raise prices. Primark owner Associated British Foods reckons it will take the hit from the higher costs of imports in order to preserve its position as a bargain retailer. Next, on the other hand, wants to pass higher prices on to its customers, but not until 2017 when its currency-weakness hedges run out.
Two ways to survive an inflation shock
Whether inflation takes hold as an ongoing problem like it did in the 70s or 80s is another question. Perhaps sterling’s recent devaluation and the inflation it’s likely to cause will end up being a one-off event. However, the Brexit process presents us with many uncertainties going forward, so I reckon it’s a good idea to position our finances so that they can withstand ongoing inflation now that this warning shot has been fired.
One method to help preserve personal buying power is to earn regular income. Salaries tend to rise over time to compensate for the effects of inflation. A second method is to invest in shares. Companies can adjust prices for inflation and their share prices tend to rise to compensate for the higher revenues and profits they then generate. The rising share price will help guard your capital against value erosion from inflation.
Compounding can beat inflation
The London stock exchange is home for many great companies with sound businesses, strong balance sheets, consistent cash flows and established trading niches. One method of keeping ahead of inflation might be to reinvest dividends back into your investments so that both income and capital returns combine to produce compounding returns.
If you choose shares carefully, underlying business growth can work with compounding returns to propel your invested funds ahead of inflation. Investing in shares is a well-trodden route to preserving and growing wealth, most institutional pension funds do it for example. If you don’t want to invest in individual firms, picking index tracking funds or other collective investments such as exchange traded funds (ETF) can be effective too. Getting involved in the stock market today may help you survive an inflation shock and any unwanted effects of inflation for years to come.
As well as inflation the Brexit process will likely confront investors with many challenges as it unfolds. Inflation could just be for starters. It's understandable that investors should feel uneasy with all the uncertainties in the air right now.
That's why the Motley Fool analysts have produced a free report called Brexit: Your 5-Step Investor's Survival Guide. It's a useful guide packed with strategies to help you preserve and grow your wealth and it could work well in your investor's toolkit in the years to come. It's free and you can get it right now. Click here.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
During September, Apple launched its latest iPhone model in Britain and raised the sterling price of the firm?s popular device by £60. Meanwhile, customers in the US will pay the same as last year for an iPhone.
This seems like an example of one of the negative effects for British consumers of the pound?s plunge against other currencies since the Brexit vote, and there could be much more of this kind of thing to come.
Higher inflation is on the way
The Bank of England (BoE) thinks higher inflation is on the way. An increase to 2% by the end…