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Inflation stays at 4%: Here are the investments that typically do well in the current environment

Karl Talbot 14th Feb 2024 No Comments

Reading Time: 5 minutes

According to the latest Consumer Price Index, inflation stood at 4% January – the same figure reported for December 2023.

So, while inflation is not longer rising it’s still double the Bank of England’s annual 2% target. With this in mind, how can investors protect their wealth?

Keep on reading for all the details or click on a link to head straight to a section…

What is inflation?

Inflation refers to the rate at which goods and services are rising by. There are numerous ways to measure inflation, but the Consumer Price Index (CPI) is the most commonly reported. The CPI is updated once a month by the Office for National Statistics (ONS) and is measured by analysing price rises for a typical ‘basket of goods’. This basket contains roughly 650 items chosen by the ONS.

It’s worth knowing that September’s CPI figure – released next month – is particularly important. That’s because it’s one of the variables that determines the amount the state pension will rise by. Under the triple lock, the UK state pension is guaranteed to rise by September’s CPI figure, average wage growth, or 2.5%.

Criticisms of the Consumer Price Index

The CPI has its fair share of critics. Some economists believe the CPI doesn’t reflect the true rate that prices are rising by. Many also suggest the typical ‘basket of goods’ used to calculate the CPI isn’t fit for purpose. For example, the CPI does not take into account house price rises, or hikes in council tax.

Why has inflation risen so much since the pandemic?

While the government often points to the ongoing Ukraine war as the main reason behind rising inflation since the pandemic, it’s worth understanding that UK inflation was already running very high before the Russian invasion began.

Let’s not forget that the Bank of England printed billions of pounds through ‘quantitative easing‘ to support the UK economy during covid-19 lockdowns. This massively increased the amount of cash in circulation, indirectly leading to a spike in inflation.

In addition, the Bank of England also slashed interest rates during the pandemic. It followed a policy of keeping rates as low as possible, for as long as possible. While this kept borrowing costs down, there’s a clear link between ultra-low interest rates and high inflation.

Given the Bank’s actions over the past few years, we shouldn’t be too surprised to see sticky inflation right now. The question is… now that interest rates have risen and quantitative easing has ended, when will inflation fall to a ‘normal’ figure of 2% or so?

Why is inflation bad for investors?

High inflation is bad news if you’ve got savings or investments. That’s because when inflation rises, the value of your wealth will fall UNLESS you earn a return that’s at least equal to inflation.

While some providers are offering savings rates in the region of 5% right now – a smidgeon above the current inflation rate – many providers are still offering misery rates.

On a similar note, major stock market indices, both in the UK and abroad, have all suffered over the past few years thanks to rising inflation and higher borrowing costs.

What investments do well during high inflation?

Given the difficult period for investors, you may believe keeping up with inflation is a futile pursuit. Yet, it’s fair to say that some asset classes typically do better than others during periods of high inflation. Let’s take a look at some of them:

1. Commodities

Commodities can refer to useful assets such as precious metals – including gold and silver – as well as electricity, oil, natural gas, wheat and grain.

Rising commodity prices can sometimes be the cause of rising inflation. So, if you invest in commodities, you should benefit if prices rise – even if these price rises lead to more inflation.

If you don’t want to buy physical commodities, it’s possible to buy a commodity-heavy ETF or ETC through an investing platform, such as eToro.

2. Real Estate Investment Trusts

Despite high inflation and the UK’s bleak economic outlook, housing is an asset that often defies gravity. House prices rose in 2020, 2021, and 2022, though they fell slightly in 2023.

While it remains to be seen whether the UK housing market will continue to fall, it would take a brave individual to bet against bricks and mortar in the long term.

If you’re optimistic the current decline is just a blip, then it’s worth knowing that buying property isn’t the only way you can get in on the action. Real Estate Investment Trusts (REITs) provide a way to gain exposure to commercial and residential property, without having to shake hands with a well-dressed estate agent.

To learn more, take a look at our article that explains how to invest in property using REITs.

3. Inflation-linked bonds

Another option to protect your portfolio from inflation is to buy an inflation-linked bond. These are pretty self-explanatory. When inflation rises, so does the value of these bonds. When inflation falls, the opposite happens. This is why interest rates have a massive impact on the value of these bonds.

You can buy inflation-linked bonds though a specialist ETF such as the ‘Vanguard Short-Term Inflation-Protected Securities ETF.’ This ETF is available to buy though eToro.

4. Specific sectors

When it comes to trying to beat inflation, it can be worthwhile thinking about investing directly in sectors that are likely to do well amid rising prices. Here are four sectors that typically do well:

  • Healthcare. When times get tough we can all cut back on luxuries. Yet sectors within the healthcare sphere are unlikely to be impacted too much by high inflation as demand is inelastic. For this reason, drug stores and pharmaceuticals could be good companies to invest in when inflation is high.
  • Supermarkets. Demand for consumer staples is also inelastic. Think about it… we all need to buy groceries, even if we have a begrudging attitude towards higher prices.
  • Energy companies. Energy is a utility that we all need to heat our homes. While we can all do our best to cut back when prices rocket, demand for energy will always be high, regardless of the economic situation.
  • Mining companies. Similar to the impact on commodities, inflation can have a big, positive impact on the profits of mining companies. This is because when demand for raw materials rises, the value of commodities also increases.There are a host of mining companies listed in the FTSE 100, including Anglo American, Antofagasta Holdings, BHP Group Plc, Fresnillo, and Rio Tinto Plc.

Warning: While the above asset classes have performed strongly in the past, there’s no sure-fire way of hedging against inflation. Past performance of an investment class shouldn’t be used as a reliable indicator of future returns. Always do your own research before making any investment decisions.

To learn more about investing, do sign up for our fortnightly MoneyMagpie Investing Newsletter.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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