Over the past few weeks the headlines have been dominated by inflation, and especially with regard to the rising cost of our energy bills. There is the usual media scaremongering that inflation is spiralling out of control with even some jumping to the conclusion that it could be a return to the 1970s.
I acknowledge that we’re all being squeezed in some form or another, and this is a phenomenon we have not experienced for over a generation. Those of us born later than the early 70’s won’t have an emotional connection to this – I’m just about one of those without that experience!
Anyone though who was an adult through the 70s and 80s is likely to have a clear memory of high inflation and the stresses it can cause. Since the early 90s inflation hasn’t been a problem in developed countries.
Whether the rise in inflation is temporary or long lived, nobody can say, and nobody has a crystal ball. The current situation has been caused by a combination of factors – supply chain disruption from Covid 19, record amounts of government spending and huge pent-up demand for people to spend which has caused a bottleneck in the system.
There are of course geopolitical events linked to energy prices at play here and it’s hard to ignore their part in driving inflation concerns. However, it is worth noting that the rise in energy prices isn’t just down to geopolitics. There are a whole host of global issues constraining supply; low wind over the course of the summer, demand from Asia and a cold winter in Europe last winter draining storage to mention but a few. It is very unlikely these will play out again simultaneously.
Furthermore, the average person doesn’t spend that much on energy and the reality is that for most people energy prices don’t matter as much as perceived wisdom suggests.
Also, the inflation rate you see or hear on the news will almost certainly not relate to your personal experience of prices. This is because the rate is based on a basket of goods based on the average person’s spending. In reality, it doesn’t mean a great deal because none of us are the average person.
To make this point ‘recreation and culture’ makes up 11% of the spending basket. That might reflect your spending at a headline level - or it might be a lot more or a lot less. But dig a little deeper and the constituents within this include things such as camper vans, acoustic guitars, barbecues, football season tickets, hamsters the list goes on and on. How relevant are these items?
Moreover, health spending represents 2% of the basket. As people age that number could be significantly higher. Our spending habits change over time and looking through the basket there are lots of things that to me seem very odd, but might be perfectly acceptable to someone else. That’s the problem when pundits get carried away with meaningless predictions that “inflation will be higher.” We all have our own personal inflation rate.
However, I believe many people are currently wondering how they can mitigate the effects of inflation. There is of course the option to reign in a bit and spend less, although through financial planning this may not need to be the case if it can be shown there is going to be enough money in the pot.
From an investor’s perspective the aim is to ensure an investment keeps pace with inflation and to have a good chance of achieving this it is best to invest into a diversified portfolio to be held ideally for 5 years plus. As a result, investing may be less effective for countering short term inflation and is more suitable for investors who have a longer time horizon.
In summary, it is extremely difficult to predict the trajectory inflation will take and our personal inflation rate will be different to the headline rate, which won’t reflect the things we spend our money on. If inflation is to remain high in the near term it is not necessarily doom and gloom, and having a diversified investment portfolio should help to counter this over the longer term.