How to protect your property and savings from inflation in 2022?
Rising fuel and energy costs have pushed inflation to its highest levels for a long time, threatening the value of investments, property, savings and pensions.
in a a report Published by the British newspaper “The Telegraphy”, author Jessica Bird reviews some tips that you can follow to protect your money from high inflation rates.
The writer stresses that prices rose significantly last year, and there are increasing fears that this wave will continue even after the epidemic subsides.
On the back of rising gasoline and household energy costs, the Consumer Price Index in England reached 5%, the highest level since September 2011, well above the Bank of England’s target of 2%, and much higher than experts had expected.
In order to combat inflation, the central bank raised interest rates from 0.1 to 0.25% last December.
However, a rate hike may not be enough to bring rates down, and there may be a series of other hikes this year.
What is the inflation rate? Why are prices rising?
Inflation measures the rate of increase in the prices of goods and services, and the Consumer Price Index, which forms the basis for a government’s inflation target, looks at the cost of hundreds of goods, from food to movie tickets, to track any rise or fall in costs.
Inflation has already risen to around 5.1% and is expected to remain at this level in the near future. The Bank of England blamed high global energy prices, as well as “obstacles” hampering the supply of goods around the world due to rising costs.
Former Bank of England Governor Andrew Bailey said the factors driving up inflation are temporary, but it depends on the fact if these factors lead to wage development and higher prices more than we currently see.
Who benefits from high inflation?
Inflation is a bad indicator for savers and fixed-income earners, who see their purchasing power declining as prices rise and the value of everyday expenses, such as food and fuel, increase.
According to the data analysis company Kantar, food prices rose at the highest rate since August last year. However, those who have debt with fixed payment plans – including the government – can benefit from inflation, as the amount owed decreases in real terms.
Will Inflation Hurt Your Investments?
Bond investors can suffer from inflation the most, and when inflation is high, investors tend to sell bonds because the real value of this type of return is eroded.
Also, higher inflation would increase the odds of raising interest rates, which would be an additional loss for bond holders, as it reduces the relative value of the returns against newly issued bonds.
Well-known investor Warren Buffett has long warned investors not to buy bonds when inflation is rising. “Inflation is not the time to buy,” says Buffett, and that investors face a “bleak future” in such circumstances because higher inflation leads to lower real revenues. But investors can protect themselves by buying index-linked bonds, as the interest paid rises according to inflation rates.
Inflation is not necessarily a bad thing for stock investors, because companies can pass on part of the costs to consumers to offset rising inflation.
Oil and mining companies will benefit from inflation, says Richard Hunter, head of markets at Interactive Investor, as higher commodity prices will increase their bottom line. “Investors benefit from the double whammy of passing on costs to consumers and making bigger gains,” Hunter adds.
On the other hand, Hunter believes that inflation may harm retailers, such as supermarkets, who may lack – as he puts it – the ability to increase prices.
Also, the returns on infrastructure and real estate investments rise with higher rates of inflation, and the value of gold can rise.
Are cash savings affected?
Despite inflation rates of 5.1%, the best savings accounts pay only about 0.6% per year, meaning that for a balance of £50,000, a person will earn only £300 a year.
The effect of inflation is significant in this case, as the real value of £50,000 will drop to £47,750 after a year.
In turn, savers benefit when higher inflation rates raise interest rates.
Is the pension affected?
The income of people receiving an annual pension is eroded if they receive it at a fixed rate, and they will suffer the most from a sharp rise in inflation.
“Level pensions” have been very popular in recent years, as people have paid more money from the start, says Stephen Cameron, director of pensions at Aegon, but this trend will start to decline as inflation rises and incomes fall.
If inflation rises more than 5.1%, as expected, savers with a defined contribution pension will have to take on more risks.
Does inflation affect real estate prices?
Inflation is a threat to the housing market because it will cause the Bank of England to raise interest rates. Purchasing power is set to decline as mortgages become more expensive, and this trend has already begun as banks abandon low-value deals and raise interest rates.
“Interest rates have been very low for a long time in Britain. People didn’t expect this (high inflation) and the psychological impact on the market could be significant,” says economist Kay Neufeld of the Center for Economics and Business Research.
The demand for home loans will fall, while homeowners will find that their home debt becomes more expensive.