The word ‘inflation’ can sometimes instil fear in investors. Thankfully, not all sectors are adversely affected by high inflation periods. Let’s take a look at three different sectors that have performed well in the past during times of higher prices.
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What does inflation mean?
Before we dive in, let’s clarify what inflation means.
In the simplest terms, inflation is the pace at which prices rise. It’s important because it shows us the value of our money. For example, if the price of a £1 loaf of bread rises to £1.03, then the inflation on your loaf is 3%. As a result of this inflation, your original pound can’t buy what it previously could.
Each country has its own ways of measuring and reporting inflation. The most common method is to use a ‘basket of goods’ containing a specific variety of items and compare how the prices of these items change from month to month.
Here in the UK, the main measure we use for tracking this is the Consumer Prices Index (CPI). We do also use the Retail Prices Index (RPI), which is similar but also includes some housing costs.
Is inflation good or bad for investors?
If the cost of goods rises, then you will be able to buy less with each pound you earn. So, higher pricing could slowly eat away at your savings and wealth. This is known as depreciation.
When it comes to investing, inflation is unfavourable because it reduces the value of any gains you make. So if you made a 3% return on an investment but the level of inflation was also 3%, your real return would be zero.
Inflationary periods can also have an undesirable effect on assets like bonds and gilts. This is because these investments have a fixed rate of return, and if inflation occurs, it reduces the real buying power of your returns.
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Which sectors have performed well in the past during inflationary periods?
According to research from Stake, there are a few areas that tend to hold up well. It’s important to note that past performance doesn’t dictate future results, but here are the sectors that have done well previously.
Energy
This is an area that has been picking up steam over the last few months as inflation rates have been creeping up. Past research shows that the energy sector has outperformed inflation over a 12-month period 71% of the time since 1973.
Real Estate
Property values have had no trouble increasing recently. During expansionary periods, the prices of leases and rents also tend to go up.
Don’t worry if you’re not a homeowner. You can still benefit from buoyant real estate prices by investing in something like a real estate investment trust (REIT).
A top tip is to avoid mortgage REITs because inflation tends to lead to higher interest rates, which increases mortgage debt.
Mining and materials
Also known as commodities, precious metals such as gold have traditionally helped investor’s portfolios during times of higher prices.
Commodities often have a fixed or limited supply, which can mean they run on a different treadmill when everything else is inflationary.
How can I protect myself against inflation?
A little bit of inflation is normal. By holding a variety of different investments and assets, you can give yourself a great chance of protecting yourself against rising prices.
Using a share dealing account to create a diversified portfolio is a great way to combat the effects of inflation.
Remember that no one knows what the future holds and the value of your investments could go up or down regardless of increasing prices. But having a plan and being prepared will give you the best chance of being successful.
