As UK inflation hits a 30-year high, it’s a good idea to review your spending habits, but for investments, this is no time for knee-jerk reactions.

It seems to be a regular headline – every few months – “highest inflation in X years”. It’s a constantly moving bar. When we last wrote about UK inflation last November, it was at 4.2%. While no one expected it to go down since then, there were few that guessed we’d breach 5% so early into the new year. Now it has hit a 30 year high of 5.5% and looks set to go up again before it changes direction. Whichever way you look at it, life is getting more expensive.

Should you review what you do with your money?

The answer is both yes and no.

Yes, it’s a good idea to review your spending, especially when it comes to the goods most affected, like energy and fuel. As the official rate of inflation is based on the average price of a common basket of goods and services, the extent it will actually affect you will depend on what you buy. While energy prices soared 23.2%, for example, clothing averaged 6.3% and food was at 4%. So consider whether you can adjust your spending habits to lessen some of the bigger shocks without compromising your quality of life too much.

That said, we’re now at the stage where prices have increased across the board, so everyone has to stretch their income further. If you’re unable to tweak your expenses enough to redress the imbalance with what’s coming in, it may be time to look at adjusting your income too, wherever possible.

But when it comes to your investments, if your capital is invested in a long-term, well-diversified portfolio that matches your risk appetite, there’s no need to veer off course. Even so, you might hear about people exploring different investment options at times like this.

Which assets do well when there’s high inflation?

As with any investment, there’s no sure thing, but some assets do tend to fare better than others when inflation is high.

Cash is obviously what suffers the most, as its value is eaten away when interest rates fail to keep up with the cost of living. Interest rates may be on the up, but at their near-zero levels they’ve got a lot of catching up to do before they can start to outpace inflation. It will take a while before we finally get to see real returns on savings again.

Meanwhile, fixed income investments such as bonds can actually do ok, especially if they’re inflation-linked, but this does tend to drop off once inflation climbs above 5%.

Many investors turn to tangible assets, like real estate, and commodities, such as gold and oil, when inflation is high. As these tend to hold their purchasing power, they’re often considered an ‘inflation hedge’. While we know property can provide good returns, it’s far from tax-efficient and hardly the most liquid asset out there. And while the performance of gold can look attractive at first glance, the longer-term view is less compelling. Over the last ten years, the average return for gold was just 1.6% compared to 16.5% for equities in the S&P 500. Gold was also one of the worst-performing assets of 2021.

Historically, the most reliable way to beat inflation over time is to have money in equities. Performance data shows that you can expect an average return in double digits over the long term with equities – more than enough to beat the average rate of inflation over the same period. That’s why we believe equities are an important part of any investment toolkit.

Where is inflation headed?

Forecasts of how high inflation could go vary depending on who you ask, but the Bank of England expects it to peak at 7% in April before returning to its target of around 2% within two years. However, that was before Russia’s invasion of Ukraine sparked a global energy crisis that could drive inflation up further.

We’ve had higher inflation before, and we’ll have higher inflation again, but this shouldn’t keep you up at night. As with any external market challenge, knee-jerk reactions won’t do your investments any favours. We’re firm believers in having patience, a clear head and focusing on what you can control.

So what can you do to soften the impact?

We’ve talked before about the benefits of minimising your tax bill in the face of rising inflation. So, as we approach tax year-end, make sure you make the most of the available tax allowances and reliefs. And, as we said earlier, check your spending habits and income to adjust them where you can.

When it comes to your investments, diversification and patience are crucial. Whatever headlines you may read about inflation in the coming months, remember that investing should be a long-term undertaking. Even as the government raises interest rates, it’s unlikely your savings will outpace inflation – and cash under the mattress certainly won’t – but, over time, a well-considered investment portfolio will.

If you’d like to give your savings and investments a health check, contact us for a financial planning review on 01372 365950.