Too early to dismiss inflation fears, warns Bestinvest

Jason Hollands, Managing Director at Bestinvest, the online investment service, comments on the latest UK inflation data:

"The latest U.K. Consumer Price Index inflation data, released this morning, has revealed that CPI inflation rose by 2.0% in the 12 months to July, compared to 2.5% in June. While this came in lower than expected, it is too early to dismiss inflation fears. The Bank of England has been guiding it will hit 4% by the end of the year, so the thumb screws could tighten further.

“While much of the surge in inflation will be a temporary effect, resulting from the sharp economic rebound after the ending of the coronavirus lock-downs, there is also a risk of the economy overheating. Pressure is building for the Bank of England to act by tapping on the brakes in respect of its stimulus programmes which have kept borrowing costs down.

“Ronald Reagan once likened inflation to a ‘hit man’ and in many respects the caricature is right, except that inflation’s victims are widespread rather than carefully selected. For households, rising prices put a squeeze on the cost of living which means some households may have to eat into those additional savings built up during the lock-downs. For businesses, it piles on extra costs through demands for wage increases. And for savers it silently gnaws away at the real value of cash deposits like a hungry rat on a piece of cheese.

“Anyone with long term savings and investments should carefully reassess whether their balance between cash and investments is right. Everyone should set aside some rainy day cash for emergencies, but too much cash left lying around is exposed to a reduction in its future spending power.

“This is not to say that investments are immune to the effect of inflation - they certainly are not, with low yielding government bonds especially vulnerable. However, dividend generating equities and infrastructure investments with inflation-linked revenues are relatively appealing in this environment. Getting a return that at least keeps pace with inflation - and preferably beating it - should be a top priority.”