Inflation falls back but with the Bank promising low rates till 2016 the threat to savings remains

17th September 2013

With the UK headline rate of inflation falling back to 2.7% in August from 2.8% in July, for the first time in two years investors are getting a positive return on gilts. But inflation is still stalking people’s savings.

Adrian Lowcock, Senior Investment Manager at Hargreaves Lansdown says: “The 10 year gilt yield index is currently offering a gross redemption yield of 2.9%, so investors are getting 0.2% above inflation.”

But with the Bank of England forecasting low interest rates until 2016, the firm has warned inflation could still outstrip returns on cash.

The Bank of England has forecast interest rates will remain low until 2016. If this is the case, savers can expect interest on their savings to remain below inflation for another three years the firm warns.

With the Consumer Price Index at 2.7%, Lowcock warns that real value of savings could half in 26 years.

He adds that since March 2009, when interest rates have been reduced to record lows, the average cost of goods and services has risen by 14.8% (CPI). Cash* has only risen by 3.4%. After interest the value of savings has been eroded by 9.9%.

“ Over the last three years inflation, after interest has been earned, has eroded the value of savings by 10.3%. Households could face the same again over the next three years should inflation remain above target and interest rates remain low until 2016.”

Hargreaves has suggested the following investment ideas to protect against inflation.

Investors can protect their savings from the effects of inflation by investing in a range of assets which are able to grow faster than inflation. Gold has long been viewed as a traditional hedge against inflation and in spite of the recent fall in the market the long term fundamental drivers for the gold price remain intact.  Equities can offer attractive inflation proofing as some companies are able to pass on any rises in costs to the consumer and therefore protect their profits. Companies can also grow their business, which means they can increase profits and raise the dividend.

Investment ideas

Troy Trojan – Sebastian Lyon has exposure to gold and gold mining equities; inflation-linked government bonds in the UK and US; and cash. He still believes in the case for gold despite a sharp fall in the price recently. He took the fall as an opportunity to add to his holding, suggesting the ultimate debasement of paper money through inflation and quantitative easing (QE) makes a strong case for having gold within the portfolio.

Threadneedle UK Equity Alpha Income – The fund maintains a core of solid, reliable companies, who have demonstrated an ability to pay consistent dividends. Outside of this defensive core, manager Leigh Harrison has been finding a number of exciting ideas in more economically-sensitive sectors. In our view, the fund maintains an edge over some of its larger rivals as it remains relatively small, meaning it has the flexibility to invest more heavily in medium-sized companies. In addition, the fund remains concentrated at only 37 stocks. We favour this high conviction approach as it means each holding will make a real difference to performance, though it does increase risk. The fund yields 3.4%.

* Cash returns based on Moneyfacts instant access £5,000

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