With inflation breaking into a sprint once again, it comes as a fresh reminder that parking your investment cash in the wrong place could be devastating.
Data released on Wednesday from the Office for National Statistics (ONS) showed the consumer price index (CPI) gauge hit a six-month high of 2.7% during August. This uptick was attributed to a rise in the price of theatre tickets and computer games, the economic body said, as well as higher sea and air fares.
This defied City expectations of a decline from July’s reading of 2.5% — analysts had been forecasting a 2.4% CPI rise last month — and suggests that the inflationary downtrend that kicked in at the end of last year could be a thing of the past.
Inflation on the charge
So what action can we expect from the Bank of England to address recent increases? Well not much right now, although the bank will no doubt be a little alarmed by August’s price pick-up.
The Old Lady of Threadneedle Street hiked interest rates last month to 0.75%, the second time benchmark rates have risen since the 2008 financial crisis. But with uncertainty related to the Brexit saga hampering economic growth in the UK (GDP edged just 0.3% higher in July, according to the ONS) it’s unlikely to have much wriggle room to justify extra rate rises, even if inflation was to keep on climbing. And particularly so if a catastrophic no-deal European Union withdrawal comes to pass.
As sterling resumes its downward trend against other world currencies, it certainly wouldn’t be a surprise to see inflation continue to head broadly higher in the coming months. The longer the uncertainty over Britain’s exit from the European trading bloc continues — a story that’s likely to run for much longer, at least in this Fool’s opinion — the more danger of additional, and significant, pressure on the pound.
Keep your cash
So what can investors do to protect themselves from rising inflation? Well, in a recent article I warned of the threat that savers face by stashing their retirement cash in the wrong place, chiefly in underperforming cash accounts.
And latest information from Moneysupermarket.com shows why. According to the price comparison site, the best instant access Cash ISA currently on the market can be picked up from Paragon Bank. The problem is that this product offers a paltry interest rate of just 1.25%, less than half of the current rate of inflation.
This illustrates the importance of buying into the stock markets instead. CPI might be ascending again but this is unlikely to worry shareholders of FTSE 100 stocks Persimmon, Vodafone and National Grid, for instance — these businesses offer dividend yields of 9.7%, 8% and 6%, respectively, right now.
There are plenty of great stocks across London’s multitude of indices that offer yields well above inflation, and which carry varying levels of risk, too. Invest wisely and don’t let inflation play havoc with your investment returns.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.