Five strategies to beat inflation

Trying to stop losing money in real terms at times of high inflation is tricky – but here are five ways you could try


Interior of a modern wine / whiskey cellar.

You don’t need to be told that inflation is high at present. It won’t have escaped people’s attention that increasing fuel prices, higher household bills, interest rates and taxes have increased – all of which are contributory factors to the 7% headline inflation rate we’re all being squeezed with at present. It’s the highest rate of inflation in 30 years. 

There are suggestions that soaring highs have yet to reach their peak. The Office for Budget Responsibility (OBR), the independent overseer of the UK’s finances, has indicated it believes inflation could rise even further, to 8.7%, by the end of 2022 because of the ongoing war in Ukraine. Such highs would have “major repercussions for the global economy”, the OBR says. And that’s the optimistic view: the Bank of England has said it fears inflation could top 10% in the future, given the inevitability of the energy price cap rising in October.

Gold is doing what it always has done in providing a stable and enduring store of value

It means that spenders are getting less bang for their buck, with average pay rises lagging inflation. As for spenders, they’re losing out significantly, with high street interest rates on savings accounts coming nowhere near to matching the rate of inflation. It all means that people are losing money by keeping their cash in bank accounts.

What should savers do to try to stay ahead of the game? Here are five strategies that could beat inflation.

1. Commodities

One of the key reasons we’re seeing rampant inflation not encountered in decades is because of the increase in the price of everything – from the stuff we fill our cars with, to the food we fill our stomachs with. Commodities like oil and wheat have seen prices rise farther and faster than inflation in 2022, driven by the war in Ukraine and its knock-on effects. 

A barrel of oil priced on the Brent crude benchmark rose 43% from $78.98 at the start of January to $113.16 by 18 April – far outstripping inflation. And had you bought at the start of the year and sold at its peak so far this year, you’d be 62% up. Wheat prices have seen similar rises as supplies which come from Ukraine and Russia have been disrupted. Of course, the price of commodities can be highly volatile, meaning they can often drop as much as they rise. Yet they tend to be a place money goes in the face of inflation. “In years gone by, when inflation has picked up, investors have often turned to tangible assets likely to rise in value, such as commodities,” says Naeem Aslam, chief market analyst at AvaTrade.

But if not investing directly into the traded commodities, it’s possible and sometimes safer to hedge one’s bets by building out your share portfolio to be populated with a range of different companies that have connections to the production and distribution of commodities. Mining-focused exchange trading funds (ETFs), or those focused on energy firms in the FTSE 100 or S&P 500, can often insulate investors from some of the more significant shifts in price.

One other perceived safe harbour for investors looking to beat inflation in times of turmoil has long been a popular investment option. “It comes as no surprise that investors have flocked to gold as inflation begins to spiral,” says Jai Bifulco, chief commercial officer at Kinesis Money. “Gold is doing what it always has done in providing a stable and enduring store of value to hedge against inflation and currency devaluation.” Over the last 50 years, gold has had an average gain of 10.6% every year. “Precious metals have historically been the asset class of choice when hedging inflation,” says Bifulco. “As access to gold increases, there is no reason not to safeguard your wealth in uncertain times.”

2. Infrastructure

Even as many key elements of the economy slow or halt due to pressures from inflation and the changed way we live our lives, there’s one thing that will continue to be needed, regardless of the economic situation. Infrastructure is always needed to keep the world going and can be accessed in several ways by investors.

Assets tied to infrastructure can be accessed through both open-ended and closed funds. Closed funds are more beneficial, in large part because it enables investors to own what are comparatively illiquid assets without having to sell them when investors into that infrastructure want to cash out. The sector is a growing one, with almost all of the 30 or so infrastructure investment trusts listed in London set up in the past decade. On average, infrastructure funds have returned 11% over a year, 49% over five years, and 196% over the past decade. 

If you don’t want to buy into infrastructure investment trusts, there are other alternatives: buying into individual companies that provide the infrastructure themselves. “Water and energy companies can do well during inflationary periods,” says David Morrison, senior market analyst at Trade Nation. “People may work hard to cut back on these basic necessities as prices rise, but overall, such action does little to dent demand.”

The ability for water and energy suppliers to raise prices in line with their costs, price caps permitting, is also a boon for investors. “But perhaps their biggest advantage is their existing infrastructure, which takes years to establish and is expensive to maintain,” says Morrison. “While that could be a downside, it is also a barrier to new market entrants, which helps protect infrastructure companies from fresh competition.”

As for real estate, we know property prices usually only move in one direction

You can also buy literal infrastructure in the form of land. “Generally, it’s best to invest in ‘productive’ assets such as land, property, infrastructure, and shares as they produce cash flow which can be used or reinvested,” says Rob Morgan, chief analyst at Charles Stanley. Not only can you potentially generate short term revenue from rental income for a business on your land, it’s also an asset that can be sold off should developers show interest. 

3. Property

Nothing is sure when it comes to investments – but one of the surest bets in living memory has been property. “As for real estate, we know property prices usually only move in one direction,” says Aslam. “Yes, there have been some instances where we have seen property prices crashing but they do bounce back sharply.” For those worried about individual fluctuations that can impact them directly, Aslam suggests diversifying portfolios by looking into real estate investment trust (REIT) products, which are designed to hedge bets.

Rental property has become an alternative investment class for many who can purchase a second home – or afford the mortgage. There are more than 2.5 million private landlords in the UK, who provide housing for an estimated 13 million people across the UK, according to lobby group Generation Rent. Rental prices rose by 2.4 per cent in the last year, according to the Office for National Statistics – factors higher than the average savings account over the same period. 

While achievable rental income is unlikely to increase by the same amount as inflation, it has historically outstripped bank account interest rates and seems likely to continue to do so. “The UK property market has experienced significant growth over the past few years and many investors are looking towards property as a way to beat high rates of inflation,” says Derek Pratt, commercial director of Sourced Capital. Of course, increasing purchase prices for homes make it more difficult for those without the highest incomes to invest in property in the first place. Although TikTok and YouTube influencers may recommend compounding your potential returns by taking out mortgages that are paid off with the income from tenants in your property, bear in mind that there’s no guarantee your rental property will be filled 12 months out of the year – meaning it could sometimes be difficult to stump up the cash you need to repay.

4. Real assets

“Artworks and other collectibles such as classic cars can be a great inflation hedge,” says Morrison. “Such real assets have already done extremely well thanks to the waves of monetary and fiscal stimuli that have been ushered in after the pandemic.” Those real assets not only have the benefit of being tangible – meaning that they will always be there, even if their value should hollow out – but they’re something you can see, touch and interact with, rather than sitting behind a screen on your bank account or a share trading app.

A diversified portfolio wouldn’t include solely real assets within it, according to the experts – instead accounting for between 10% and 20% of a person’s entire investment in an ideal world. And it’s worth bearing in mind that property itself is also a real asset, and so can quite easily bump up the overall exposure to real assets in your portfolio.

“I would also put into that category land and even physical things that might hold their value over long periods such as antiques or classic cars,” says Morgan. Yet just as you need to beware not to overexpose yourself to such assets, Morgan also cautions against diving headlong into the sector without some research. “Specialist knowledge is often needed here,” he says, “but if any of these areas are ‘your thing’ then it might be a good place to put your money over the long term. The downside tends to be the inability to buy or sell quickly and the costs involved in doing so.”

5. Enterprise Investment Scheme

One potential route for inflation-busting investment that many people haven’t heard of – and often overlook – is the Enterprise Investment Scheme (EIS). It’s a government-backed initiative that gives individuals tax relief for buying new shares in qualifying companies. By buying into small companies at an early stage of their growth, there’s the potential for a large return, multiple times greater than the amount initially put in. It’s been around for more than 25 years and was brought in by the government to try to kickstart investment in early-stage businesses. In all, more than £24bn has been invested into 35,000 businesses. 

“Investors investing in EIS qualifying companies benefit from a mix of upfront and ongoing tax reliefs, including up to 30% income tax relief, capital gains deferral, loss relief, inheritance tax relief and tax-free growth on exit,” says Jonathan Prescott, director at Praetura Ventures. Those who invest in the EIS are also able to carry back income tax relief against their previous year’s income tax bill.

It’s an alternative to the traditional angel investment route that many companies go down, while also being an opportunity for everyday individuals to dip their toe in the water when it comes to buying into startups. “Over the past couple of decades, a significant number of companies have raised capital on a deal-by-deal basis attracting significant investment from ‘angels’,” says Prescott. “However, as EIS becomes more mainstream and accessible, fund managers have professionalised the investment opportunity and offer investors access to a diversified portfolio of EIS-qualifying companies, with the objective of mitigating risk via a portfolio approach to investing. 

He points out that while “the potential upside for investors can be considerable, investing in early-stage businesses comes with risk and must be balanced against their own risk appetite”. That’s a warning to bear in mind for every option on this list, and one worth considering when trying to beat the rising cost of living: sometimes it’s better to be safe than sorry, and to take fewer losses than others.