How your investments can help with the rising cost of living

5 min read 29 Sep 22

Summary: With inflation at the highest level in decades, we look at what is being done to help individual households, and how you can get the most out of your investments.

The cost of living crisis continues to dominate people’s concerns. Inflation (which measures the rate at which prices of goods and services go up) is running at around 10% in the UK, the highest level in decades. Around the world, rising energy and food prices are putting a strain on people’s finances.

Energy prices have an impact on pretty much every aspect of life – when energy prices rise, the costs of goods and services also rise, and those costs feed through to affect individual household bills.

The surge in natural gas prices since Russia’s invasion of Ukraine in February is a major factor behind the current elevated inflation level. In August, Ofgem, the energy regulator, announced that the average annual energy bill will increase by 80% to £3,549 in October. Since then, the UK’s new Prime Minister, Liz Truss, has announced an Energy Price Guarantee, which will limit the annual bill for a household with typical consumption levels to £2,500 for the next two years. This, Truss said in her speech to the House of Commons, “will give people certainty on energy bills, curb inflation and boost growth.”

What else is happening?

The chart below shows the UK’s Consumer Prices Index inflation rate reached 9.9% in the year to August. Although down from 10.1% the previous month, this is still well above the Bank of England’s target of 2%. With inflationary pressures expected to persist, it is looking likely that the Bank of England will raise interest rates from the current base rate of 1.75%, in another bid to get inflation under control.

Source: Refinitiv Datastream, 15 August 2022 

In order to boost economic growth, the Prime Minister has moved towards a lower tax regime, with focus on wealth redistribution. The tax cuts propose to help households protect some disposable income each month. However, the cuts have received criticism and concern due to the market reaction with the pound falling to record lows against the US dollar. Consequently the cuts are also likely to complicate the Bank of England’s mission to bring inflation down.

Employment is another factor to consider. In September, the Office for National Statistics (ONS) reported that the unemployment rate fell to its lowest point in 48 years. On the other hand, the squeeze on incomes remains, with rises in regular pay failing to keep up with the rising cost of living. When taking the rise in prices into account, the value of regular pay fell by 2.8%, the ONS has said.

Options are out there

With prices rising faster than wages, high inflation is effectively reducing household income. Inflation also creates challenges for savers. In order to try to protect your money from the eroding nature of inflation, you may want to consider looking into higher-yielding savings accounts or investments. Following the recent interest rate rises by the Bank of England, some of the best fixed rate savings accounts now offer around 4% for 3 years, although this is still lower than the current inflation rate.

Having a diversified investment portfolio can also help grow your nest egg. In an environment of rising prices, investments and the income from them will need to keep pace to help maintain your buying power. The good news is there are several assets that offer the potential to rise in value with inflation and could help protect you from its corrosive effects.

These include inflation-linked bonds, whose income, also known as coupons, will track a measure of inflation and therefore their price. This is a function of the coupons, and will be less hit by rises in interest rates.

In some cases, company shares pay out income in the form of dividends that grow above the rate of inflation. Often the cash flows from infrastructure or utility companies are linked to inflation, so that can help investors receive a higher income stream. Property also has the potential to offer protection against the threat of rising inflation over time.

Although inflation has been high for some time, this situation may not last for as long as we think. The Bank of England states ‘the rate of inflation is forecast to keep rising this year. But we expect it to slow down next year, and be close to 2% in around two years.’

With energy prices being a big driver of this inflationary period, the shift to greener sources of energy such as renewables could reduce the impact of higher oil and gas prices. EU chief Ursula von der Leyen said in her State of the European Union address that the “Next Generation EU” plan signified a "relief for the European economy" and a "constant stream of investment" into sustainable energies such as solar plants and wind parks.

With so many inflationary and deflationary forces to consider, the future path of inflation will remain as unpredictable as ever.

If you are concerned about higher inflation, you may wish to consider seeking financial advice. Speaking to a financial adviser can help you define an up-to-date investment plan, unique to your goals and needs.

Please bear in mind that we are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. The views expressed here should not be taken as a recommendation, advice or forecast.

The value of any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

By M&G Investments

The views expressed here should not be taken as a recommendation, advice or forecast.

The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested. 

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