Inflation

Inflation is in the news again! CPI (consumer prices index) is up 5.10% in a year to the 30th November; the highest annual increase since September 2011. Some people might be concerned about how this will affect their standard of living, retirees may worry that they should have worked that extra year, that they’ll have to cut back on luxuries or that their investments may perform poorly. These worries may be compounded by the personal tax allowances such as the personal allowance, basic rate limit, CGT annual exempt amount, lifetime allowance and IHT nil rate band being frozen until April 2026 (a reduction in real terms).

Should I be worried?

Historically, equities have shown little correlation with CPI, and the same can be said for the bdb 60% equity portfolio, as shown in figure 1 below.

Figure 1: Showing the rolling annual returns of CPI vs bdb 60% Equity Portfolio 2006 to 2021.

Over this time period £1 would have grown to £3.10 had it been invested in the bdb 60% equity portfolio. In comparison you have needed £1.42 for every £1 to achieve the same spending power in November 2021 compared to January 2006.

In conclusion, if your investment portfolio incorporates globally diversified equities, you are in a good place to hedge against inflation.