The Bank of England has forecasted that inflation will hit 4% this year as the UK’s robust recovery from the pandemic accelerates at a blistering pace. They also hinted that an increase in interest rates next year might be needed to keep rising prices in check. However, the world’s central banks all believe that this high inflation is only ‘transitory’, and the rate will fall back towards the target of 2% shortly after.
Due to most of the economy now back open and businesses reporting strong sales, the central bank’s monetary policy committee (MPC) has said that the economy would grow by 8% in 2021 – up from a forecast in May of 7.25%. This will regain the UK’s pre-pandemic level of growth by the end of this year.
In financial markets, bond investors are often viewed as ‘the smartest guys in the room’. Bonds mostly pay out a fixed income, which loses its value in real (after-inflation) terms as prices rise. So, they should be pretty sensitive to where inflation might go from here – but they don’t seem to be worried. Which would suggest that they too think that the rise in inflation is ‘transitory’ and will soon return to normal levels.
“CPI inflation has risen markedly, to above the monetary policy committee’s target of 2%, and is projected to rise temporarily to 4% in the near term. The rise largely reflects the impact of the pandemic as the economy recovers,” the Central Bank said in its latest monetary policy report.
“This has led to higher energy and goods prices, which in turn reflect rising commodity prices, transportation bottlenecks, constraints on production and strong global demand for goods. As such, above-target inflation is expected to be transitory, as commodity prices stabilise, supply shortages ease and global demand rebalances,” it added.
If there is no new major wave of Covid-19 during the winter, then the economy should perform in line with the Central Bank’s forecasts. However, any set back caused by the pandemic – or indeed anything else – then this rise in inflation could increase. This is why we believe that hedging your portfolio with ‘inflation proof’ stocks is a safe way of approaching the next 2 years. As you might expect, these include suppliers of raw materials. Miners of all types, oil and steel producers and chemicals manufacturers. Glencore (LSE: GLEN) is an option for those who want to specifically target commodities such as coal. BlackRock World Mining Trust (LSE: BRWM) gives far broader exposure to the sector. You could also be tempted by gold specific stocks. The easiest way to invest in gold is through an exchange-traded fund such as iShares IPhysical Gold ETC (LSE: SGLN). Looking at US stocks you could sway towards Freeport-McMoRan (NYSE: FCX) which is one of the leading copper producers in the US. Nucor (NYSE: NUE) is North America’s largest steel producer. Kinder Morgan (NYSE: KMI) who currently own an interest or operate approximately 83,000 miles of oil and gas pipelines and 144 terminals in North America.
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