Investors have been urged to inflation-proof their portfolios as experts predict rising prices will have to “do the heavy lifting” in the UK’s economic recovery from the coronavirus pandemic.
Advisers, analysts and fund managers have raised concerns the country’s debt levels are simply too high to be repaid through tax rises, with politically acceptable shake-ups merely scraping the surface of the increased balance owed.
With previous periods of high inflation often occurring during or after recessions, a hefty rise in inflation would not necessarily surprise investors and would, in fact, mirror the past.
Steve Russell, co-manager of the Ruffer Total Return fund, said: “The coronavirus pandemic has hit public finances like a war and across the world governments have scrambled to offset the economic impact.
“Such debt levels are simply too big to be repaid through tax rises. Inflation – not growth, austerity or taxation – will have to do the heavy lifting, which poses the greatest risk to savers today.”
Steve Carlson, chartered financial planner at Carlson Wealth Management, agreed. He said: “We can’t repay the debt through taxation; it will need to be inflated away.
“There is also going to be pressure worldwide to keep interest low as borrowing levels are so high, so that could lead to stagflation – high inflation and low interest rates.”
According to Adrian Lowcock, head of personal investing at Willis Owen, there was “huge potential” for high levels of inflation over the next five years, while Tom Becket, chief investment officer at Psigma, said he was preparing for a period of rising inflation, which he had named the ‘turbulent 20s’.
Mr Becket added: “‘Recency bias’ across consumers and economists alike has contributed towards a view that such trends will persist, but there is now a chance that there are a number of factors that could lead to a rise in inflation in the coming decade.”
The great spend
The UK’s debt hit £2tn for the first time earlier this year as the government shed cash in its attempts to save jobs and businesses amid the coronavirus crisis.
Official figures from the Office of National Statistics showed public sector debt stood at £2,060bn at the end of September – around 103 per cent of gross domestic product.
In July, the UK’s national debt dwarfed the size of the economy for the first time since 1961 and September’s 103 per cent ratio was the highest since the early 60s, too.
The pandemic has had an impact on public sector borrowing that is unprecedented in peacetime.
Provisional estimates indicate the £208.5bn borrowed in the first half of the current financial year (April to September 2020) was nearly four times the £54.5bn borrowed in the whole of the last full financial year.
This week yet more measures were announced to support businesses and workers during the pandemic, including an extension of the furlough scheme to March.
Mr Russell said: “In the UK, increasing everyone’s income tax by 1 per cent would only raise an estimated £5bn to £6bn, while a 1 per cent rise in VAT would raise about £7bn.