The best anti-inflation investment you can make….

Tuesday 18th October 2016

In this issue of Money Truths….

  • The Marmite war….
  • The effects of a weak pound….
  • Prepare for the big squeeze….
  • The best anti-inflation investment you can make….

The Marmite war….

As wars go, it didn’t amount to much of one. Nor did it last very long.

The big guns and the heavy ordinance never made it to the theatre of operations. This was more a case of pop-guns and handbags at dawn. And if you blinked, you missed it.

Last week the consumer goods conglomerate, Unilever – producers of multiple brands popular with Britain’s supermarket trolley pushers (think Marmite, Dove shampoo, Ben & Jerry’s ice cream, Flora & Bovril) – wanted to increase their prices by an average of 10% across the board.

Unilever say that ingredients and the prices of commodities used in packaging – priced in dollars – have increased as a result of the weakened pound. Unilever’s case is this: unless prices rise now, their profits will fall.

Tesco – ever-mindful that every little helps – were resistant. Perhaps they were thinking about Britain’s hard-pressed consumers. Or perhaps there was a little more self-interest at work.

Tesco’s operating profit margin in the last financial year amounted to just 1.9%. Perhaps their real concern last week revolved around how a 10% rise in the price of buying from Unilever would play out in a market where the likes of Aldi and Lidl make it absolutely necessary to be competitive on price.

Whatever the motivation, Tesco removed Unilever products from its shelves. It was likely intended as a show of strength. And it made for a curious scene.

In my local Tesco there were plenty of empty spaces. One grizzled old-timer was heard to remark that it was ‘like shopping in communist Russia’.

Maybe she’d been camped-out in Moscow during the years before Perestroika and Glasnost and was qualified to make the comparison. Maybe she was just put-out that she was unable to stock-up on Radox and Brut aftershave.

It seemed to me like a slight over-reaction – but an illustrative one nevertheless. How quickly tempers fray when the consumer products we take for granted can’t be found where we expect them.

The effects of a weak pound….

The impasse was brought to a swift resolution. There was a fair bit of back-room bartering during which both parties agreed to submit to further negotiation for the good of the industry and the consumer….

Disaster has been averted – at least for the time-being. Marmite – and the rest of the delights produced by the Unilever brand have returned to Tesco’s shelves. The fabric of British society remains intact.

But this whole episode, trivial as it might seem, serves as an alarm bell – a warning of what is coming down the pipe….

The pound is weak against other currencies – weak as a kitten. Some commentators put the blame for that squarely on the vote for Brexit. But Brexit is only part of the story.

The fact is that the Bank of England’s (BoE) Quantitative Easing programme – which has increased the money supply by tens of billions – has also played its part in diluting the pound and driving down its value.

But we are not here to apportion blame. Our focus is fixed firmly on trying to understand where all this will lead. And all roads lead to higher prices and a squeeze on consumers in the months and years ahead.

A weak pound means imports cost more. It is inevitable that manufacturers and producers will seek to pass those increased costs on. And the consumer will ultimately pay the price.

Mark Carney, BoE governor, conceded as much last week. He said things ‘are going to get difficult’ – particularly for those on a low income. Analysts predict that inflation could hit 3% by the end of next year – up from the 0.6% level recorded at the end of last month.

Prepare for the big squeeze….

You will first start to notice the effects of inflation in your shopping trolley. The prices of the food you eat and the household products you consume will be among the first to rise. But it won’t stop there. The prices of other products and services will rise too.

The price of everything will rise in time. Your pound will gradually buy less. Your salary will no longer stretch as far as it did. What you have will not be worth what it once was. That’s how inflation works.

And we cannot look to the pointy-heads and the planners for a solution to our dilemma. None will be forthcoming.

When inflation takes hold, raising the interest rate is an obvious remedy. As interest rates increase, consumers save more because returns are higher. With less disposable income to spend as a result of the increase in savings, the economy slows and inflation decreases.

But, as we have repeatedly observed in Money Truths over the last few weeks, interest rates – at an historic low – will not be going anywhere. That tool will be kept locked up in the shed – and it won’t be taken out and wielded any time soon.

Raising interest rates in the current economic climate where growth is sluggish (and that’s being generous) would be to whip away the crutches on which the hobbled economy depends. Like a patient who has lost the use of his legs, the whole body would come crashing down with a sickening crunch.

Mark Carney was very clear on this last week. He said the BoE is willing to tolerate inflation over the course of the next few years [my italics] in order to avoid higher joblessness and to make sure the economy can adjust as well as possible.

He talked about the summer interest rate cut – to its current 0.25% level – as being essential to protect 500,000 jobs. An interest rate hike now would put those jobs back in jeopardy. And it is inconceivable that the costs of such a rise would end there.

Interest rates are going nowhere – as we have maintained. Inflation is set to become a new fact of economic life in Britain. The big squeeze is just round the corner.

The best anti-inflation investment you can make….

So how do we position ourselves to cope best with the consequences of this new twist in the game? How can we protect ourselves against the ravages of inflation?

Is there anything we can do to offset or overcome the effects rising prices? Or must we simply accept that the money we have, the money we earn and the money we spend is worth less to us now than it was before?

For investors the traditional route out of the inflation pickle is to hold investments that increase in value at a rate in excess of the rate of inflation.

Property is traditionally a popular choice. Rising prices increase the resale value of a property over time. In the meantime the property can generate rental income. And, as prices rise across the board, rents charged to tenants can be increased – enabling income generated to keep pace with, if not extend beyond, the inflation rate.

There’s certainly a huge demand for property to rent. Only last week the Royal Institute of Chartered Surveyors claimed that the UK faces a ‘critical shortage’ of homes to rent….

But real-estate is not without its own problems and potential pitfalls. It is just about as expensive to buy as it ever has been. That makes it difficult for many to get involved – evidence by the growing number of people looking for rents.

And, buying at the top of any market is not an ideal scenario. For sure, there is the prospect of further gains ahead. But there also exists the potential for big losses if or when the market suffers some kind of correction.

Stocks are another traditional choice for the investor hedging against inflation. Companies can pass rising costs on to customers – giving them a chance to make profits that keep pace with inflation.

But, like the housing market, the stock market is very close to the top of its 10-year range. Stock are not cheap at the moment. The potential for additional growth exists. But so too does the potential for big falls.

If you’re going to get involved in the stock market as an inflation-hedge, it is important to pick and choose wisely.

Some stocks are better positioned to pass on increased costs to customers than others – and they are the ones of most interest. Take Unilever, for example. Customers will continue to buy toothpaste and toilet paper – whatever it costs. The alternative is unthinkable for most consumers.

Perhaps the best thing you can do in times of inflation is to invest in yourself – in new knowledge and skills that enable you to increase your earning power in your current job, grow any business you are currently involved with or create an additional stream of revenue.

For the man-on-the-street there is no more effective way of combatting inflation than increasing future earning power potential.

If you can increase your earnings at a rate beyond inflation, you effectively offset and overcome its effects. You can get in front. At the very least you will not go backwards.

One way of going about this is to ask for a rise. Good luck with that. Another way is to go out and gain new knowledge and learn new skills that will be most needed in the future – by employers and consumers.

Investing in new skills is probably a lot less risky than investing in property and stocks. Less expensive too. And if you pick what you learn wisely, the likelihood is that the investment you make in yourself will produce gains for a long time to come. Who can say the same about houses and stocks?

That’s how it looks from here….

I’ll be back with more next Tuesday.

Best wishes,

Dave Gibson

Dave Gibson

Money Truths