PA ANALYSIS: Where best to hide from inflation

As March’s UK inflation figures were released predictions fired around whether it had peaked, interest rate expectations and all manner of rationale.

PA ANALYSIS: Where best to hide from inflation

Yet how much of this month’s print is down to commodity prices and post-Brexit sterling weakness as opposed to the timing, as we approach the Easter weekend late this year?

While some see the month-on-month CPI stabilisation at 2.3% as a breather with more lofty heights expected over the summer, others are more ambivalent.

It’s not the mid-late 1970s or early 1980s, after all.

While some more experienced colleagues might easily remember double-digit inflation (even I can remember the number pushing past 7% in the early 1990s), there is now an entire generation of investors for whom inflation has never been a problem.

"Wealth managers tend to use inflation-plus to benchmark, meaning targets will become harder to reach"

James Calder, research director at City Asset Management asks: “Is 2.3% an issue when the Bank of England is targeting 2%?

“I think it’s more of a concern when you get into the negative numbers. That is when central banks start to worry because they are never quite sure how to fix that. We’re not exactly into double digits.”

Calder says because inflation rebases rather than compounds annually, it alleviates some of the risk adding that deflation is the greater cause for concern.

“Above 2% they are probably running a bit of an overheated economy, but a bit of inflation is good – certainly for equity markets.

“It might pick up a bit and then tip back down again next year to where [the Bank of England’s] long-term target is, but regardless, I can’t see interest rates picking up until we know where the economy is after Brexit; whether it’s about to go gangbusters or not, then we might expect to see a normal rate cycle starting to reappear.”  

Many wealth managers tend to use inflation-plus as a baseline benchmark, meaning those targets will become harder to reach over the coming months.

So where are they looking?

“We believe the best way to protect against UK inflation would be to buy US inflation-linked bonds because we see the UK vehicles as nonsensically expensive,” said Tom Becket, chief investment officer at Psigma Investment Management.

Becket expects inflation to reach as high as 3% over just the next couple of months but says it is important to distinguish between the short-to-medium and the medium-to-long term outlook.


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