By David Porter, Chartered Financial Planning Consultant, Armstrong Watson LLP

INFLATION is now at its highest level for 40 years, having risen from an average of 2.3 per cent between January 2000 to the start of 2022, as measured by the Consumer Price Index, to nine per cent in April. But aside from a huge increase in prices, what does this mean in relation to investments? When inflation is about two per cent – the Bank of England’s government-given target – it goes virtually unnoticed. Economists reckon some inflation is necessary to keep the wheels of the economy moving and that two per cent is about the right level. Prices still increase, but they do so slowly and are balanced to a degree by other prices falling. At two per cent, the phrase “cost of living” is not automatically followed by the word “crisis”.

When it comes to investment, financial advisers have always taken inflation into account by considering “real” returns, in addition to your objectives and risk capacity. These are calculated by deducting the inflation rate from the investment rate of return (the nominal return). For example, if an investment return is eight per cent and inflation is six per cent, the real return is plus two per cent (eight per cent to six per cent), but when inflation is two per cent, the real rate of return is six per cent – three times as much. Real returns, like their nominal counterparts, can also be negative.

A negative real rate of return means that your investment’s buying power is shrinking. The higher inflation, the more important it is to think in terms of “rea” rather than nominal rates. For example, take today’s savings market, where the top rates have risen in response to the Bank of England’s base rate increases. You can now earn over one per cent on an easy access account, the best nominal rate for several years, but still the worst real rate for many years because of inflation.

So how can cash savers hope to bridge the gap? The answer may be to invest in “real assets” such as shares, fixed interest, and property. But is this a good time to invest? It`s all too easy to get caught up with some of the news we regularly hear about financial markets. The key factor, however, is not about when to invest but rather the amount of time you invest for. No one knows with certainty when investment markets will rise or fall. Past performance is no guarantee of future performance. The value of investments can fall as well as rise and investors may not get back their original investment.

Trying to time the investment markets is not only stressful, but also very seldom successful. Leaving funds invested for the medium to long term, for those who can afford to do so, usually produces the best returns. Volatility is a part of investing, which is why we always take time to understand how much risk any client is prepared to take before investing. We also generally believe in the benefit of diversification of assets to help manage some of the extremes of the markets.

Our team can guide you through the investment solutions. Please contact David Porter on 01756 620000 or email