Inflation surges to 5.1%: what does it mean for investors?

Inflation is now at 5.1%, meaning the prices of everyday goods continue to rise. So what can investors do to protect themselves? Karl Talbot takes a look.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Inflation in newspapers

Image source: Getty Images

Inflation is now running at 5.1% year on year according to the latest ONS data. This means prices are rising at their fastest pace in over 10 years.

So what does rising inflation mean for investors? And how can you protect the value of your cash? Let’s explore. [top_pitch]

Why is inflation so high?

The Office for National Statistics (ONS) has revealed that inflation is now running at 5.1% compared to this time last year. This figure is 0.9% higher than a month ago, which means the inflation rate has continued to accelerate over the past few weeks. At 5.1%, the UK’s inflation rate is now at its highest since September 2011.

The ONS says accelerating inflation can be attributed to rising costs of transport, fuel, energy, clothing and used cars. The government’s independent statistics provider also says higher costs of raw materials have played a part.

Rising costs mean many Brits will now have to make big sacrifices to afford everyday goods. As Sarah Coles, senior personal finance analyst at Hargreaves Lansdown explains: “What’s particularly alarming about many of these price rises is that once we’ve shopped around and traded down, there’s nothing we can do to cut costs except make horrible sacrifices.

“It’s why so many people are having to make difficult decisions about heating their homes and the journeys they can afford to make, and are having to put off essential home repairs and maintenance that will cost them far more in the long run.”

It’s worth knowing that today’s 5.1% inflation rate is calculated using the Consumer Price Index (CPI). This is done by monitoring price rises of a typical ‘basket of goods’. Critics of the CPI suggest isn’t as accurate as the less popular Retail Price Inflation (RPI) measure which, according to the ONS, is now at 7.1%!

This extraordinary RPI figure, the highest in over 30 years, suggests inflation may be running higher than the government claims. For more on this, see our article that explains how inflation is measured.

Where will inflation go in 2022? 

The International Monetary Fund recently suggested that inflation would hit 5.5% early next year. Meanwhile, the Bank of England has made similar estimates, suggesting inflation would hit a peak of 5% in the spring.

It’s worth knowing that the Bank of England has the power to curb rising inflation by upping its base rate. Its Monetary Policy Committee is due to meet on 16 December to decide whether to increase it. However, markets do not expect a base rate rise to happen just days before Christmas, though it is possible in early 2022.

[middle_pitch]

Why are prices rising by so much?

While economists often argue about the causes of inflation, many point the finger at the Bank of England’s quantitative easing policies.

That’s because quantitative easing, a more formal term for ‘printing money’, increases the supply of money. This action, particularly when conducted on a large scale, can devalue currency and lead to higher prices of everyday goods. 

The Bank’s lack of action on the base rate has been cited as another factor behind rising inflation, as has the government’s spendthrift attitude to public money during the ongoing pandemic. To put this into context, public spending in 2020/21 was £167 billion higher than had been planned before the pandemic.

What does rising inflation mean for investors?

Rising inflation has the potential to negatively impact stock prices. That’s because businesses may find it a struggle to pass on higher prices to customers. It could be that customers will be unwilling to pay more for goods or services that were previously cheaper, or simply that they cannot afford higher prices.

Rising inflation also makes it more difficult for businesses to make future investing decisions, which can limit growth. Both of these factors can cause the share prices of individual companies to fall.

As well as stock prices, bond prices rarely escape the effects of rising inflation. That’s because inflation essentially erodes the purchasing power of a bond’s future cash flow, which can harm returns.

Knowing where to stash your wealth during periods of high inflation is challenging to say the least. Sadly, there is no clear strategy guaranteed to come up trumps. That being said, it’s worth knowing that investors often turn to commodities, such as gold, in periods of high inflation, hoping that these assets will hold their value in real terms.

Others turn to property, or simply maintain faith in the stock market. That’s because in the past, returns from investing in a diversified portfolio have typically outperformed inflation in the long run. However, there are no guarantees that this will be the case in future!

To learn more about investing, take a look at The Motley Fool’s investing basics guide.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »