How to position your portfolio for higher inflation

If the Chancellor wasn’t worried about his spring statement on Tuesday evening, I think we can be pretty sure he was indeed very worried at 7:01 a.m. Wednesday morning. At 7am the Office for National Statistics released the latest UK inflation figures.

Thanks mainly to rising energy and fuel prices, inflation in the UK (measured by the consumer price index) reached 6.2%, a 30-year high. The Retail Price Index (RPI), the old measure, rose 8.2%. Reminder: the Bank of England’s inflation target (meeting it is its main task) is 2%. The worst, as Rishi Sunak knows, is yet to come.

There is an opinion in the UK that there are elements of Brexit in this. There is none (EU-wide inflation is also 6.2%). It’s about war (which always brings inflation) spurring an inflationary environment created by money printing and pandemic supply disruptions (we’ve spent £400bn on the costs of the pandemic policy) responding to the energy supply constraints created by the march to net zero.

Energy prices are expected to rise more than 10% this month and food prices have also risen. The Bank of England now expects inflation to peak at over 8%. That makes double digits almost a given.

A real crisis

This is therefore a real crisis in the cost of living. Sunak, who presided over an increase in Britain’s tax burden equivalent to 2% of GDP, reportedly ate his breakfast on a pile of newspapers stuffed with requests about the many things to do. He was told to raise the National Insurance (NI) threshold to protect low-income people; delay or abolish the impending 1.25 percentage point increase in the NI; postpone the freezing of income tax allowances (tax increase under another name); abolish the £70 about to hit household bills to pay compensation to energy companies that have gone bankrupt; anticipating the increase in benefits to reflect the sharp rise in inflation (low-income households cannot be expected to cope with an RPI of 8.2% without immediate assistance); and reduce fuel taxes. He could, almost everyone said, somehow make the pain go away.

But of course, in the end, he couldn’t. Those who wanted the NI threshold to rise got what they wanted – and it’s a good way to protect some low earners. The reduction in fuel taxes will also appeal to some – but given the volatility of energy prices, it is more symbolic than anything else. All in all, he had no real rabbits in his hat. And with growth likely to slow in a rise in inflation, he is unlikely to find any.

In short, the government cannot protect you from this financial mess. You have to do it yourself. So stay at work if you can. In times of inflation you need as many income streams as possible, and if we enter a period where some power goes back to work, returns on capital will surely fall – so it’s better to have earned income as well as unearned income. As for the latter, choose wisely.

Few fund managers prepared for inflation (the transitory story was far too easy for them to handle). Look for those that have them (our podcast this week with Charlotte Yonge of Troy Asset Management is a useful start) – and make sure you have some. It’s not too late to prepare. Consider Personal Assets Trust, Capital Gearing, Ruffer, BH Macro and JP Morgan Core Real Assets to start with.

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