Can inflation fall to 0.2% to dampen your money?
A low inflation rate is usually a cause for celebration among savers. But experts warn that the dramatic fall announced by the Office for National Statistics last week could have a tail-stinging incentive for millions of stock market investors.
Consumer price index inflation has fallen from 1 percent in July to just 0.2 percent in August – mainly due to the popular eating out to help Chancellor Rishi Sunak.
The 100 million discounted meals meant restaurant prices were lower than a year earlier – the first time in more than three decades.
Sting in the Tail: Low inflation also reduces the likelihood of an interest rate hike by the Bank of England, which raises interest rates when trying to keep runaway inflation in check
The good news for savers is that 661 accounts are now beating 0.2 percent inflation, meaning your money is growing in real terms.
But low inflation also reduces the likelihood of a rate hike by the Bank of England, which hikes interest rates if it wants to keep runaway inflation in check.
And last week, the Bank did not rule out that the 0.1 percent base rate would turn negative in the future.
Experts say a long spell of low inflation and lows could turn out to be bad news for UK stock markets.
And that is exactly what Alistair McQueen, head of Savings and Retirement at Aviva, is now predicting. He says, “Much in life feels uncertain these days, but one thing that seems certain in the near future is a prolonged period of low inflation and interest rates.”
“ This is good news for those who want to borrow and spend money, but for those who want to save and live off those savings, times are difficult, ” McQueen added.
Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, warns that if low inflation sets in in the longer term, it could have a dampening effect on stock prices. “Continued low inflation can have a negative effect on equities, as falling prices over a significant period of time are likely to hurt corporate income,” she explains.
“There could also be a spiral effect, as deflation can encourage consumers to delay purchases, save money and cut spending, further reduce corporate revenues and impact dividends.”
So how should investors respond? Streeter says it might be worth your while to go to companies with massive cash balances, such as tech giant Apple. “Companies with a lot of money are immune to the risks of falling prices,” she says.
‘You could also think of companies that offer’ valuable ‘products and services. These are better able to hold up during a period of deflation as consumers tend to trade in difficult times. ‘
Teodor Dilov, fund analyst at Interactive Investor, says, “For investors concerned about the general market, gold can act as a haven.” He recommends iShares Physical Gold ETC, which aims to track the daily spot price of gold and physically invest in the metal.
For income seekers, the hunt for returns is only getting more difficult. Many FTSE 100 companies have cut or even suspended dividend payments this year because profits have been tarnished. It’s unclear when those payments will return.
The main dividend payers are now insurers Aviva and M&G, as well as tobacco companies Imperial Brands and BAT.
Traditionally, income seekers can also rely on government and corporate bonds to achieve stable returns. However, yields are already low and inflation close to zero will keep them suppressed.
Roger Clarke, a partner in The Private Office’s financial planners, explains: “Low inflation has a knock-on effect on the level of interest – the so-called coupon – you can get from bonds, since they don’t have to. offer a lot to beat what banks and building societies have to offer, making for very low returns. ‘
While bond and stock yields remain low, investors may want to reassess how much they are getting out of their portfolios to avoid rapidly eroding their capital.
Clarke has one strategy that can help investors get out of what could be months or years of low income. “One option is to split your portfolio into different portfolios – the low-risk portion that you could access in the short term, while leaving the higher risk for the longer term,” he says. ‘If you manage it well, you can avoid the harmful effect of cashing in low markets.