Five strategies to beat inflation

You don’t need to be told that infla­tion is high at present. It won’t have escaped people’s atten­tion that increas­ing fuel prices, high­er house­hold bills, inter­est rates and tax­es have increased – all of which are con­trib­u­to­ry fac­tors to the 7% head­line infla­tion rate we’re all being squeezed with at present. It’s the high­est rate of infla­tion in 30 years. 

There are sug­ges­tions that soar­ing highs have yet to reach their peak. The Office for Bud­get Respon­si­bil­i­ty (OBR), the inde­pen­dent over­seer of the UK’s finances, has indi­cat­ed it believes infla­tion could rise even fur­ther, to 8.7%, by the end of 2022 because of the ongo­ing war in Ukraine. Such highs would have “major reper­cus­sions for the glob­al econ­o­my”, the OBR says. And that’s the opti­mistic view: the Bank of Eng­land has said it fears infla­tion could top 10% in the future, giv­en the inevitabil­i­ty of the ener­gy price cap ris­ing in Octo­ber.

It means that spenders are get­ting less bang for their buck, with aver­age pay ris­es lag­ging infla­tion. As for spenders, they’re los­ing out sig­nif­i­cant­ly, with high street inter­est rates on sav­ings accounts com­ing nowhere near to match­ing the rate of infla­tion. It all means that peo­ple are los­ing mon­ey by keep­ing their cash in bank accounts.

What should savers do to try to stay ahead of the game? Here are five strate­gies that could beat infla­tion.

1. Commodities

One of the key rea­sons we’re see­ing ram­pant infla­tion not encoun­tered in decades is because of the increase in the price of every­thing – from the stuff we fill our cars with, to the food we fill our stom­achs with. Com­modi­ties like oil and wheat have seen prices rise far­ther and faster than infla­tion in 2022, dri­ven by the war in Ukraine and its knock-on effects. 

A bar­rel of oil priced on the Brent crude bench­mark rose 43% from $78.98 at the start of Jan­u­ary to $113.16 by 18 April – far out­strip­ping infla­tion. And had you bought at the start of the year and sold at its peak so far this year, you’d be 62% up. Wheat prices have seen sim­i­lar ris­es as sup­plies which come from Ukraine and Rus­sia have been dis­rupt­ed. Of course, the price of com­modi­ties can be high­ly volatile, mean­ing they can often drop as much as they rise. Yet they tend to be a place mon­ey goes in the face of infla­tion. “In years gone by, when infla­tion has picked up, investors have often turned to tan­gi­ble assets like­ly to rise in val­ue, such as com­modi­ties,” says Naeem Aslam, chief mar­ket ana­lyst at Ava­Trade.

But if not invest­ing direct­ly into the trad­ed com­modi­ties, it’s pos­si­ble and some­times safer to hedge one’s bets by build­ing out your share port­fo­lio to be pop­u­lat­ed with a range of dif­fer­ent com­pa­nies that have con­nec­tions to the pro­duc­tion and dis­tri­b­u­tion of com­modi­ties. Min­ing-focused exchange trad­ing funds (ETFs), or those focused on ener­gy firms in the FTSE 100 or S&P 500, can often insu­late investors from some of the more sig­nif­i­cant shifts in price.

One oth­er per­ceived safe har­bour for investors look­ing to beat infla­tion in times of tur­moil has long been a pop­u­lar invest­ment option. “It comes as no sur­prise that investors have flocked to gold as infla­tion begins to spi­ral,” says Jai Biful­co, chief com­mer­cial offi­cer at Kine­sis Mon­ey. “Gold is doing what it always has done in pro­vid­ing a sta­ble and endur­ing store of val­ue to hedge against infla­tion and cur­ren­cy deval­u­a­tion.” Over the last 50 years, gold has had an aver­age gain of 10.6% every year. “Pre­cious met­als have his­tor­i­cal­ly been the asset class of choice when hedg­ing infla­tion,” says Biful­co. “As access to gold increas­es, there is no rea­son not to safe­guard your wealth in uncer­tain times.”

2. Infrastructure

Even as many key ele­ments of the econ­o­my slow or halt due to pres­sures from infla­tion and the changed way we live our lives, there’s one thing that will con­tin­ue to be need­ed, regard­less of the eco­nom­ic sit­u­a­tion. Infra­struc­ture is always need­ed to keep the world going and can be accessed in sev­er­al ways by investors.

Assets tied to infra­struc­ture can be accessed through both open-end­ed and closed funds. Closed funds are more ben­e­fi­cial, in large part because it enables investors to own what are com­par­a­tive­ly illiq­uid assets with­out hav­ing to sell them when investors into that infra­struc­ture want to cash out. The sec­tor is a grow­ing one, with almost all of the 30 or so infra­struc­ture invest­ment trusts list­ed in Lon­don set up in the past decade. On aver­age, infra­struc­ture funds have returned 11% over a year, 49% over five years, and 196% over the past decade. 

If you don’t want to buy into infra­struc­ture invest­ment trusts, there are oth­er alter­na­tives: buy­ing into indi­vid­ual com­pa­nies that pro­vide the infra­struc­ture them­selves. “Water and ener­gy com­pa­nies can do well dur­ing infla­tion­ary peri­ods,” says David Mor­ri­son, senior mar­ket ana­lyst at Trade Nation. “Peo­ple may work hard to cut back on these basic neces­si­ties as prices rise, but over­all, such action does lit­tle to dent demand.”

The abil­i­ty for water and ener­gy sup­pli­ers to raise prices in line with their costs, price caps per­mit­ting, is also a boon for investors. “But per­haps their biggest advan­tage is their exist­ing infra­struc­ture, which takes years to estab­lish and is expen­sive to main­tain,” says Mor­ri­son. “While that could be a down­side, it is also a bar­ri­er to new mar­ket entrants, which helps pro­tect infra­struc­ture com­pa­nies from fresh com­pe­ti­tion.”

You can also buy lit­er­al infra­struc­ture in the form of land. “Gen­er­al­ly, it’s best to invest in ‘pro­duc­tive’ assets such as land, prop­er­ty, infra­struc­ture, and shares as they pro­duce cash flow which can be used or rein­vest­ed,” says Rob Mor­gan, chief ana­lyst at Charles Stan­ley. Not only can you poten­tial­ly gen­er­ate short term rev­enue from rental income for a busi­ness on your land, it’s also an asset that can be sold off should devel­op­ers show inter­est. 

3. Property

Noth­ing is sure when it comes to invest­ments – but one of the surest bets in liv­ing mem­o­ry has been prop­er­ty. “As for real estate, we know prop­er­ty prices usu­al­ly only move in one direc­tion,” says Aslam. “Yes, there have been some instances where we have seen prop­er­ty prices crash­ing but they do bounce back sharply.” For those wor­ried about indi­vid­ual fluc­tu­a­tions that can impact them direct­ly, Aslam sug­gests diver­si­fy­ing port­fo­lios by look­ing into real estate invest­ment trust (REIT) prod­ucts, which are designed to hedge bets.

Rental prop­er­ty has become an alter­na­tive invest­ment class for many who can pur­chase a sec­ond home – or afford the mort­gage. There are more than 2.5 mil­lion pri­vate land­lords in the UK, who pro­vide hous­ing for an esti­mat­ed 13 mil­lion peo­ple across the UK, accord­ing to lob­by group Gen­er­a­tion Rent. Rental prices rose by 2.4 per cent in the last year, accord­ing to the Office for Nation­al Sta­tis­tics – fac­tors high­er than the aver­age sav­ings account over the same peri­od. 

While achiev­able rental income is unlike­ly to increase by the same amount as infla­tion, it has his­tor­i­cal­ly out­stripped bank account inter­est rates and seems like­ly to con­tin­ue to do so. “The UK prop­er­ty mar­ket has expe­ri­enced sig­nif­i­cant growth over the past few years and many investors are look­ing towards prop­er­ty as a way to beat high rates of infla­tion,” says Derek Pratt, com­mer­cial direc­tor of Sourced Cap­i­tal. Of course, increas­ing pur­chase prices for homes make it more dif­fi­cult for those with­out the high­est incomes to invest in prop­er­ty in the first place. Although Tik­Tok and YouTube influ­encers may rec­om­mend com­pound­ing your poten­tial returns by tak­ing out mort­gages that are paid off with the income from ten­ants in your prop­er­ty, bear in mind that there’s no guar­an­tee your rental prop­er­ty will be filled 12 months out of the year – mean­ing it could some­times be dif­fi­cult to stump up the cash you need to repay.

4. Real assets

“Art­works and oth­er col­lectibles such as clas­sic cars can be a great infla­tion hedge,” says Mor­ri­son. “Such real assets have already done extreme­ly well thanks to the waves of mon­e­tary and fis­cal stim­uli that have been ush­ered in after the pan­dem­ic.” Those real assets not only have the ben­e­fit of being tan­gi­ble – mean­ing that they will always be there, even if their val­ue should hol­low out – but they’re some­thing you can see, touch and inter­act with, rather than sit­ting behind a screen on your bank account or a share trad­ing app.

A diver­si­fied port­fo­lio wouldn’t include sole­ly real assets with­in it, accord­ing to the experts – instead account­ing for between 10% and 20% of a person’s entire invest­ment in an ide­al world. And it’s worth bear­ing in mind that prop­er­ty itself is also a real asset, and so can quite eas­i­ly bump up the over­all expo­sure to real assets in your port­fo­lio.

“I would also put into that cat­e­go­ry land and even phys­i­cal things that might hold their val­ue over long peri­ods such as antiques or clas­sic cars,” says Mor­gan. Yet just as you need to beware not to over­ex­pose your­self to such assets, Mor­gan also cau­tions against div­ing head­long into the sec­tor with­out some research. “Spe­cial­ist knowl­edge is often need­ed here,” he says, “but if any of these areas are ‘your thing’ then it might be a good place to put your mon­ey over the long term. The down­side tends to be the inabil­i­ty to buy or sell quick­ly and the costs involved in doing so.”

5. Enterprise Investment Scheme

One poten­tial route for infla­tion-bust­ing invest­ment that many peo­ple haven’t heard of – and often over­look – is the Enter­prise Invest­ment Scheme (EIS). It’s a gov­ern­ment-backed ini­tia­tive that gives indi­vid­u­als tax relief for buy­ing new shares in qual­i­fy­ing com­pa­nies. By buy­ing into small com­pa­nies at an ear­ly stage of their growth, there’s the poten­tial for a large return, mul­ti­ple times greater than the amount ini­tial­ly put in. It’s been around for more than 25 years and was brought in by the gov­ern­ment to try to kick­start invest­ment in ear­ly-stage busi­ness­es. In all, more than £24bn has been invest­ed into 35,000 busi­ness­es. 

“Investors invest­ing in EIS qual­i­fy­ing com­pa­nies ben­e­fit from a mix of upfront and ongo­ing tax reliefs, includ­ing up to 30% income tax relief, cap­i­tal gains defer­ral, loss relief, inher­i­tance tax relief and tax-free growth on exit,” says Jonathan Prescott, direc­tor at Prae­tu­ra Ven­tures. Those who invest in the EIS are also able to car­ry back income tax relief against their pre­vi­ous year’s income tax bill.

It’s an alter­na­tive to the tra­di­tion­al angel invest­ment route that many com­pa­nies go down, while also being an oppor­tu­ni­ty for every­day indi­vid­u­als to dip their toe in the water when it comes to buy­ing into star­tups. “Over the past cou­ple of decades, a sig­nif­i­cant num­ber of com­pa­nies have raised cap­i­tal on a deal-by-deal basis attract­ing sig­nif­i­cant invest­ment from ‘angels’,” says Prescott. “How­ev­er, as EIS becomes more main­stream and acces­si­ble, fund man­agers have pro­fes­sion­alised the invest­ment oppor­tu­ni­ty and offer investors access to a diver­si­fied port­fo­lio of EIS-qual­i­fy­ing com­pa­nies, with the objec­tive of mit­i­gat­ing risk via a port­fo­lio approach to invest­ing. 

He points out that while “the poten­tial upside for investors can be con­sid­er­able, invest­ing in ear­ly-stage busi­ness­es comes with risk and must be bal­anced against their own risk appetite”. That’s a warn­ing to bear in mind for every option on this list, and one worth con­sid­er­ing when try­ing to beat the ris­ing cost of liv­ing: some­times it’s bet­ter to be safe than sor­ry, and to take few­er loss­es than oth­ers.