Shares and the fight against inflation

Why shares are your best weapon in the fight against inflation

When inflation began its descent from shock and awe highs of 11.1%¹last October, many of us started feeling hopeful that ghastly price rises were finally coming to an end. But of course, the journey was never going to be quick and easy: inflation’s downward path from its summit is proving more ambling rambler than a hastened hiker. 

Although falling a little when compared to May, June's CPI inflation reading for the UK remained painfully high at 7.9%¹ – the highest of all the G7 nations.² What’s more, worries persist that it may remain elevated for some time, as core inflation, which strips out more volatile prices like food and energy, sits at 6.9%¹ – just a drop off May’s 31-year high of 7.1%.¹ It’s why the Bank of England has continued aggressively raising interest rates – most recently by 0.5% to 5%.³

Longer term, although the Bank of England forecasts it to fall significantly over the next year,⁴ inflation seems keen not to play ball with economic predictions, and in the years to come the prospect of unravelling globalisation, large increases in spending on the energy transition and possibly defence, not to mention ageing populations, may keep it elevated at uncomfortably high levels.

It leaves savers scratching their heads over how best to beat inflation. While savings rates are looking increasingly juicy, the buying power of cash is still being eaten into by even higher rates of inflation. What’s more, given inflation’s grisly effect on the economy, stock markets have hardly given us much to cheer about either.

Recently, AJ Bell decided to take a sneak peek back through history and run some numbers on how various financial assets have fared against inflation over time.

And the winner is…

Quids in

Wander through the annals of history all the way back to 1983 and you’ll find the year the £1 coin was first minted. Since then, over a four-decade timeframe, the value of the pound has fallen by more than two thirds in real terms as a result of inflation – bringing into sharp focus its corrosive impact on buying power.⁵

Below are the returns of various assets after accounting for inflation.

Quids in

Wander through the annals of history all the way back to 1983 and you’ll find the year the £1 coin was first minted. Since then, over a four-decade timeframe, the value of the pound has fallen by more than two thirds in real terms as a result of inflation – bringing into sharp focus its corrosive impact on buying power.5 

Below are the returns of various assets after accounting for inflation.

Sources: AJ Bell, Morningstar, Bank of England, ONS, Land Registry, inflation based on RPI from 1983 to 1988 and CPI thereafter.

It paints a clear picture: if you’re looking for a real return, savings or investments seem best placed to beat the underside of a mattress.

Gold is often lauded for its inflation-busting abilities, and the data supports this. Just above gold, you find the UK’s government bonds also stay ahead of inflation, for those seeking a lower-risk investment. One more notch, and given the UK’s obsession with bricks and mortar, it’s a relief to see property taking a leap over inflation too.

Then, for the moderate risk seeker, there’s the balanced managed fund – a one-stop shop that spreads risk by investing in a mix of assets including shares, bonds, cash, and potentially property and alternatives too.

Topping the list, however, are strategies investing purely in shares. While the stock market may feel like a rollercoaster ride from time to time given the swings in value – indeed the dotcom crash or the global financial crisis are good examples of this – the rewards from investing in riskier assets and therefore the likelihood of staying ahead of inflation are the greatest.

For those willing to lock away their cash for at least five years – but ideally much longer – history tells us stock market investing offers the best hope for growing their wealth ahead of inflation. Alliance Trust is one way of doing this: a diversified investment trust with a global equity approach – aiming to provide both a capital uplift and a source of income by investing in shares from markets all over the globe.

What’s more, out of 19 investment trusts that have consecutively raised their dividends for 20 years or more – known as the ‘dividend heroes’ - Alliance Trust is one of only three that have beaten inflation over the past five years in terms of dividend growth, net asset value (NAV), and share price returns.⁶ Please remember though, past performance is not a guide to future performance.

Marcus de Silva is a Freelance Investment Writer.

This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of Towers Watson Investment Management (TWIM), the authorised Alternative Investment Fund Manager of Alliance Trust PLC, and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at July 2023 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice.