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Inflationary woes

It seems investors should be readying themselves for a “backs against the wall job” after Bank of England governor Mervyn King wrote his second letter in just over a year to Chancellor Alistair Darling.

King’s letter was prompted by inflation breaking through the 3 per cent barrier, with rising food and energy prices cited as the main cause of the troubles.

What is more worrying is King believes worse is to follow, claiming it is likely to hit 4 per cent before Big Ben chimes for the final time in 2008.

In the past 12 months agricultural prices have risen exponentially while oil prices have stolen the headlines after recently touching $140 a barrel.

The question on everyone’s lips is how to stave concerns of inflation in the UK.

PSigma income manager Bill Mott believes inflationary concerns are likely to be temporary so long as wage prices are kept under control. He says that as domestic inflation concerns are low, the only real worry is another spike in oil and energy prices, which he says is unlikely.

He says: “I think that inflation peaks are nearing and the only concern is that these rising prices seep into wage concerns and lead to wage inflation. It is important that there are tight wage restraints to offset that possibility.”

All roads then lead to Prime Minister Gordon Brown to see whether he gives in to the public sector and renegotiates pay rises. If that happens all bets are off on how far these inflationary pressures can go and the older heads will cast their minds worryingly back to the 1970s when inflation hit 25 per cent for two years. Though its important to stress we’re not anywhere near that market at the moment.

The obvious question left to investors now is if inflation pressures do grow where is the safest place to put money.

Fidelity head of IFA channel Peter Hicks says that unconstrained funds are a promising route for investors.

He says: “The most important thing is to be diverse in investment. It sounds obvious but many assume that traditional asset classes are heavily correlated when they are anything but. Most companies are pointing to a slowdown in earnings, but not all of them, that is why bottom-up stockpickers are likely to find opportunities in the market.”

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