Inflation Risks

Many have concluded that economic growth is unsustainable. Some say that profitability and growth go hand-in-hand. Yet, throughout history, the accumulation of riches has been countered by increases in the cost of goods and services.

Some modern instances of the Circular Economy may explain the point I am making and point towards an interesting anomaly. We have too few HGV drivers. Therefore wages increase to attract qualified staff. As a result, the employed drivers earn more but spend it on other scarce resources such as energy, and difficult to obtain merchandise.

With more money in the economy, prices increase, encouraging growth because profit margins widen. In the past, this resulted in increasing production. However, some resources are becoming scarce. There is a greater awareness of the environment and the impact of emissions.

Recycling old technology tends to be ineffective other than the reclamation of materials. For example, an old landline telephone cannot convert into a smartphone. Likewise, you cannot efficiently convert an internal combustion-powered car to an emission-free electric car, so modern life becomes a compromise.

In financial planning, there are similar compromises to be made. A secure savings plan held in cash is unlikely to generate enough interest to keep pace with inflation* (at time of writing over 5%). An investment needs to yield more than 5% AFTER charges to maintain the purchasing power. The compromise is that assets performing this well are seldom as stable as a cash deposit. In other words, their performance will probably be more volatile (As a graph, there will be peaks and troughs).

Another compromise might be to retain some funds in cash, knowing that they will probably underperform but offer easy access and a degree of solidity. In contrast, other funds can be made to work harder over the medium to long term. As always, when contemplating investments that use equities, property and bonds – returns can go down as well as up.

If you wish to take a fresh look at investments in light of low interest, increasing inflation and emerging into a changing investment environment then please get in touch.

Call 01733 314553 or email info@brookswealth.co.uk

* Bank of England letter to Chancellor 16 December 2021: CPI 5.1%

Eamonn Dorling Dip PFS

Senior Independent Financial Adviser

Brooks Wealth Management