Inflation is rising all over the planet. In the UK, latest Office for National Statistics (ONS) data showed that prices are rising particularly strongly too, putting extra pressure on savers’ pockets.
The ONS gauge of consumer price inflation in Britain rocketed to 3.2% in August, it said on Wednesday. This was the highest level since March 2012 and the biggest month-on-month jump since records began in the late 1990s. Consumer price inflation rose by a less severe 2% in July.
Prices have jumped as supply chains have come under pressure from Brexit disruption and resurgent Covid-19 infection rates. Some economists think consumer prices could even rise as much as 5% by the end of the year.
Inflation is rocketing
It’s probable that inflation will cool down from the peaks predicted at the end of 2021. However, it could well remain around elevated levels if supply chain issues last.
As I said, this presents an extra challenge for those who wish to invest their cash. With inflation at current levels, the value of the money held in low-interest financial products is eroding sharply.
Let’s look at the best-paying instant-access Cash ISA currently on the market, for example. According to price comparison site Moneysupermarket.com this is offered by Aldermore with a 0.6% annual interest rate. If I put £100 into this account I’d have £100.60 after 12 months.
Let’s use that 3.2% rate of inflation for illustration purposes. Based on this figure, the things that cost £100 to buy when I put the money in that Cash ISA would cost me £103.20 a year later. The purchasing power of my cash has declined by £2.60.
Why I’m buying UK shares
This is why I think buying UK shares is a great idea today. Firstly, stock investing offers me the chance to make returns that beat most other savings products available on the market today. And the returns I can expect to make over the long term should also comfortably beat the rate of inflation.
As we saw in 2020, stock markets can collapse and dividends can be reduced or even cancelled. But such bumps have always proved temporary, and on a long-term basis, average returns for UK share investors have tended to be on the bulky side. Indeed, history shows the average annual return from stock investing sit at a handsome 8%.
Of course past success is never a guarantee of future performance. But I think those sorts of returns proven over many decades are too good to ignore. This is why I own UK shares in a Stocks and Shares ISA and buy stocks whenever I can. And buying British stocks with big dividend yields is a particularly good way to beat the problem of elevated inflation today.
A few companies I own like housebuilders Barratt Developments and Taylor Wimpey carry yields that sail above the current rate of consumer price inflation (at 5% and 6% respectively). There are plenty of other great stocks on the FTSE 100 alone with generous and realistic dividend yields too, that I’m thinking of snapping up. These include insurer Aviva and courier Royal Mail.
Make no mistake… inflation is coming.
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Royston Wild owns shares of Barratt Developments and Taylor Wimpey. 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.