• Income-paying assets will once again offer a real rate of return as inflation falls.
• BoE hiked for the 12th consecutive time to fight stubborn inflation.
• But hope is on the horizon as economists predict an inflation drop by next year.
Despite annual CPI inflation still being in double digits at 10.1% for March, there is good news on the horizon. March’s data is a notch lower than in previous months, and the Bank now expects inflation to drop to 5% by the end of this year as energy price escalation eases, falling to the target rate of 2% by the end of 2024.
Inflation is typically measured using an inflation rate, which represents the percentage change in the average price level of a basket of goods and services over a specific period, often on an annual basis. It is commonly calculated using consumer price indices (CPI) or producer price indices (PPI), which track the prices of a representative basket of goods and services consumed by households or the prices of goods and services at the producer level, respectively.
Energy and food have been key drivers of elevated inflation and the cost-of-living squeeze is impacting households, so lower inflation means respite for so many, but also a lower bar for income investments to offer a real rate of return.
Last week the Bank of England raised interest rates for 12th consecutive time to 4.5% – the highest level for almost 15 years as it fights to get inflation under control. This comes just a week after the US Federal Reserve and the European Central Bank hiked rates too, similarly stacked against rising prices. The Bank of England is still some way from being able to declare victory but here are three of our preferred picks below to help fight inflation.
3 income fund ideas to fight inflation, according to Joseph Hill, Senior Investment Analyst, Hargreaves Lansdown
1) Aviva UK Listed Equity Income
In this fund, manager Chris Murphy aims to generate a combination of income and growth and an income return greater than the FTSE All Share index over the long term. He blends companies able to offer a high yield now with others he thinks are capable of strong dividend growth in the future.
Lots of these are large companies, many with global operations. That means their success can depend on the state of the global economy, not just how well the UK does. As of the end of April the fund yields 4.50%.
2) Janus Henderson UK Responsible Income
Experienced equity income manager Andrew Jones aims to provide a good level of income alongside capital growth over the long term. The fund avoids companies considered to have a significant negative impact on people, the environment and animals.
Some of these areas, like tobacco and oil & gas, feature heavily in traditional equity income funds because of their relatively high dividends, which means this fund can yield and perform differently from the wider market. As of the end of April the fund yields 4.44%.
3) Legal & General UK 100 Index
The index invests in the 100 largest companies in the UK stock market. While the FTSE 100 is a UK index, many of the companies listed on it also earn money overseas. That means investors will be indirectly investing in foreign economies as well as the UK. The fund invests in every company in the index and in the same proportion. As of the end of April the fund yields 3.50%.
What Causes High Inflation
Inflation refers to the general increase in prices of goods and services in an economy over a period of time. It means that the purchasing power of a currency decreases, as more units of currency are required to buy the same goods and services.
Increase in money supply: When there is an excessive increase in the money supply, either through printing more currency or through expansionary monetary policies, it can lead to a rise in inflation. When there is more money in circulation, people have more purchasing power, which can drive up demand for goods and services, thereby increasing prices.
Demand-pull inflation: This occurs when the demand for goods and services exceeds the available supply. When demand outpaces supply, sellers can increase prices, leading to inflation. Factors such as increased consumer spending, government stimulus programs, or rapid economic growth can contribute to demand-pull inflation.
Cost-push inflation: This type of inflation occurs when the cost of production increases, leading to higher prices for goods and services. Factors such as an increase in wages, raw material costs, energy prices, or taxes can push up production costs, forcing businesses to raise prices to maintain their profit margins.
Expectations of future inflation: Inflation can be influenced by people’s expectations of future price increases. If individuals and businesses anticipate that prices will rise significantly in the future, they may adjust their behavior accordingly. For example, workers may demand higher wages to compensate for expected inflation, leading to a wage-price spiral.
External factors: Events outside of a country’s control can also impact inflation. For instance, if a country heavily relies on imported goods and the value of its currency declines relative to other currencies, the cost of imported goods can increase, leading to higher prices domestically.
Inflation can have both positive and negative effects on an economy. Moderate inflation can be indicative of a healthy and growing economy, as it encourages spending and investment. It also allows for nominal wage increases, which can improve living standards. However, high or unstable inflation can be detrimental to an economy. It erodes the purchasing power of consumers, reduces the value of savings, distorts price signals, and can lead to economic instability.
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