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1. Darius McDermott, Chelsea Financial Services

“Inflation can erode the value of the assets in your portfolio, although the impact on some assets is not as devastating as it might be on others. Equities, along with commodities and real estate, provide a hedge against inflation because of the potential for higher capital appreciation and dividend growth.  Companies, particularly those in a strong market position, enjoy the ability to increase prices, thereby combating inflation.  Income from dividends has historically provided equity investors with a substantial proportion of their overall return, and dividend growth is just as important. As we have seen, income from an investment that pays out a static dividend each year will quickly lose its purchasing power.   For this reason, income funds can potentially provide investors with an income stream that increases by more than the rate of inflation each year.

“In order to achieve this goal, fund managers need to target companies with good services or products, and with strong market positions that can generate enough cash to finance their own destinies.   In other words, companies which are able to grow their earnings over a long period, progressively grow their dividend, and reinvest some of that cash back into the company to help it grow organically or acquisitively. Over time, the success of such a business will be reflected in its stock price. This type of investment will, therefore, provide the investor with dividends, dividend growth and long-term capital returns."

2. Anna Sofat, Addidi Wealth Management

“Over the past 2 years, inflation (as measured by RPI) has been 3.69%; it was 2.24% over the past 6 months and 1.2% over the past 3 months (to end of March 2010). Our inflation forecast is 2.2% over the next 12 months rising to 4% over the next 3 years.  There is still a small chance that recovery will stall and we will get deflation. However, the most likely outcome is a slow economic recovery with anaemic growth. As such, we do expect inflation to rise over the medium term – we have enjoyed a long period of low inflation growth but there are already inflationary pressures in the emerging markets and commodities. Given the increasing interdependence of global economies, I expect this inflationary pressure to filter through to the developed economies. I also think that the key focus in the UK and US will continue to be economic growth with an increasing focus on debt reduction and as such there will be less of an imperative to bring down inflation by raising interest rates. Inflation helps to reduce the burden of debt (by reducing the real value of debt) so there will also be an economic rationale for the government to allow inflation to creep up.”

3. Mike Horseman, Cockburn Lucas Independent Financial Consulting Limited

“I look to provide various inflation proof assets inside client portfolios, with a selection of Index linked bonds and on a global basis using a range of mutual funds. By combining these two assets together – coupled with some commodity exposure which will normally provide further inflationary protection – provides a diversified spread and a direct way to protect against inflation increases over the coming years, in a cost effective and actively managed manner. I also feel that allocation towards areas such as food and agriculture will provide some inflationary protection as demand will drive pricing.  Utilities that can set their prices for water and electricity etc may also be a good bet.   I would say the risks of deflation are diminishing inside the western economies, as the US starts to show signs of vitality.  However, a benign period of growth and an anaemic recovery inside the UK could tip us into a Japanese style period of deflation – although the risks have hopefully been reduced due to the fiscal package and stimuli that have been introduced so far.”

 4. Raj Shah, Blue Wealth Partnership

“A very simple piece of inflation proofing advice is to reduce and slash your current spending across the board.  For an investment portfolio, we recommend index linked national savings certificates with a maximum investment of £15,000 per issue.  As the RPI is normally manipulated lower, they will only ever offer a partial hedge against high inflation. Unfortunately, there is nothing savers can do about this. Overall Index Linked Certificates are a useful addition to a saver's portfolio and the trick to using them is diversification – i.e. don't put all your eggs in one basket.  For the more experienced investor with an appropriate risk profile, a simple way to invest is via a fixed-income exchange traded fund (ETF) or Index Linked Gilts.

“It is crucial to be aware that if Quantitative Easing goes wrong, then you can expect inflation. Inflation attacks the 'real' value of cash. We need protection, and that protection can be found in commodities. Industrial metal and agricultural commodities typically appreciate when inflation is rising because the economy is expanding and so to is the demand for raw materials.  Given that one of the drivers of inflation could potentially be weak sterling, a European Income fund may be a sensible option as it diversifies currency risk, as well as meets the other criteria.”

5. Scott Gallacher, Rowley Turton (IFA) Ltd

“I am more concerned about the risk of hyper inflation as opposed to deflation – given the £200 billion Quantitative Easing plan and unprecedented interest rate cuts from the Bank of England in order to avoid the risk of a 1930’s style depression.   I would advise clients to avoid having a too significant cash holding as high levels of inflation tends to erode the real value of cash very quickly.  For example, at the moment with RPI inflation of 5.40%, a higher rate income tax payer receiving 3.00% gross interest is looking at a loss of 3.60% per annum in real terms. For low risk investors, National Savings Index Linked certificates would appear to offer exceptional value at the current time as these are paying a tax free return of RPI + 1.00% on investments of up to £15,000 per issue over 3 or 5 years terms.  For those clients willing to take some risk with their capital, they could look to construct portfolios with a core holding of defensive equity funds – as equities tend to provide a ‘hedge’ against inflation.”

6. Alan Smith, Capital Asset Management Plc

“Inflation does not currently appear to be serious concern with the new government’s intent on keeping interest rates low. In addition, as we emerge very slowly from recession there is little upward wage inflationary pressure as competition for jobs allows employers to cap any pay rises.  Therefore for the time being, a so-called ‘Goldilocks’ monetary policy of “not too hot, not too cold” will aim to keep inflation under control for the rest of the year and well into 2011. However the economy will undoubtedly pick up and we can expect interest rates to begin to rise and the whole inflationary cycle to continue – the promise of “no boom and bust” now rings very hollow. 

“In addition it is important to consider one’s own personal inflation rate as this can differ widely from the official rate – it all depends what you spend your money on. Traditionally older people experience much higher price inflation as their core expenses such as fuel, council tax and petrol have increased at a faster pace than other goods and services.”

7. Nick Lincoln, Values To Vision Financial Planning

“When it comes to the issue of inflation – and indeed in general - our clients expect us to take a long-term view of their assets.  Naturally this leads us to encourage them to invest in equities; within the limits of their attitude to risk and at the rate of return they need their portfolios to deliver to achieve their goals in life.  As such we don’t get drawn into making market predictions about the short, medium or long-term rate of inflation. We know no more than the market knows, and if the market knows (or thinks it does, which is the same thing as far as asset prices go) then it has already priced in various inflation scenarios into the prices of gilts and equities.  We suggest investing in equities as far as you need to, and know you are in an asset class that should serve you well over the coming decades - whatever the inflationary outlook.  All we know is what we know now. In other words, RPI at 4.4% is not especially conducive to protecting the real value of your cash over the long-term. Avoid cash except for the short-term!”

8. Kevin Tooze, Equity Partners UK Ltd 

“Inflation has always been an obsession of the British. Information regarding crucial financial issues such as fuel prices, banking disasters, elections and war are fed to us at breakneck speed from around the world and each day there appears to be a new disaster waiting to pounce, but I do not think inflation in the UK is one of them.  The pound has gained some strength in recent weeks and although the FTSE 100 has been pegged back a little, the markets have been resilient in the face of securitization disasters and greedy banking.  It is in the interest of the nation and new government as a whole to keep the lid on excessive inflation. Pay rises will have to wait and tight control of the leviathans of industry will have to be instigated to prevent obscene rises in the cost of utilities and fuel profits when the majority of the public are struggling.   The Bank of England will not want to stifle the housing market by increasing interest rates and a low pound must go some way to making buy-British a good idea. Inflation will not go away but neither do I see the historic rates of 13% returning too soon.”

 9. Robin Keyte, Tower of Taunton

“Some guaranteed ways of inflation proofing include National Savings & Investments index linked certificates. Currently Issue 20 of the 3 year certificate is offering tax free returns of RPI + 1.00% pa, and Issue 47 of the 5 years certificate the same.   Index-Linked Gilts offer interest payments pegged ahead of RPI and the capital is increased ahead of RPI each year. However be wary of buying an index-linked gilt in the market at a premium, you should seek advice on this to get the best price. You could also consider an Index-linked annuity; however these start at much lower levels than a level pension so you will have less income in the earlier years.  Other ways of investing to keep ahead of inflation - without such guarantees – include investing in equities or property (commercial or retail) over the longer term where total returns should exceed inflation by 2-4% per annum. 

“I think inflation will remain reasonably low over the next year or so, reflecting the severity of the damage to our economy from the global economic meltdown.  However, I do not think deflation is a credible threat.  I have confidence in the work of the Bank of England Monetary Policy Committee in walking that narrow path on setting interest rates and Quantitative Easing.”

10.  Danny Cox, Hargreaves Lansdown

“Our current view is we expect inflation to fall away towards 2% for CPI.  However, rising oil and petrol prices and further Sterling weakness could drive prices up.  On the other hand wage inflation is falling.  For cash holdings National Savings Index Linked Certificates are guaranteed to beat inflation as measured by the RPI.  The returns are 100% safe as they are backed by the Government and are tax free.  Investing in the stock market is the best way to inflation proof your portfolio.  Over time, the stock market should produce real (above inflation) returns.  In terms of annuities, at retirement, an escalating annuity should be considered.  Retirement could easily be 20 or 30 years and over that time inflation will eat away at the buying power of a pension.  RPI annuities are expensive but one alternative is to use a fixed 3% escalation.  Some years you will win above inflation increases, other years you will be behind.  However, this type of annuity will keep pace better than a level pension which is guaranteed to devalue over time.  We expect some deflation in the housing market and generally inflation to fall towards the 2% CPI target.”

Karen Barrett, Chief Executive of unbiased.co.uk, comments: “The Bank of England Governor delivered the latest quarterly inflation and growth forecasts last week, indicating that he expects inflation to fall in the coming years.  As a result, they will be in no hurry to raise interest rates - and are yet to completely rule out further Quantitative Easing.  Experts and analysts have differing views on what this means for the economy, as well as consumers’ personal finances, disposable income, and investments.  If you are looking for advice on how to protect the value of your cash and your investments, an independent financial adviser can assess your financial situation as a whole and advise you on products from across the whole of market.

“Only an IFA can look at all factors relevant to an individual and their circumstances, and recommend the best solution for them. To find an independent financial adviser near you, visit unbiased.co.uk’s ‘find an IFA’ service to find details of a qualified, local IFA who specialises in the area of advice you are looking for.”

ENDS

Karen Barrett, Chief Executive, unbiased.co.uk: 020 7833 3131

Anna Schirmer/Anna Moulds/Charli Scouller, Lansons Communications: 020 7294 3682

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