Inflation hits 1%. Options for savers and investors?

Inflation rose to its highest level in 22 months in September. The consumer prices index (CPI) rate of inflation increased to 1.0%, up from 0.6% in August and looks certain to go even higher in the next few months, possibly exceeding the Bank of England’s 2% target next year.

The upshot is that savers need to find an account or Cash Isa paying more than 1% to earn a real return on their deposits. They are increasingly difficult to find. The good news is that the Bank of England is now unlikely to cut rates again, but the bad news is that savers can only look forward to rising inflation.

Interestingly, the Office for National Statistics (ONS) said that there was 'no explicit evidence' that the 20% fall in sterling following the Brexit vote had pushed up prices. The main contributor to the increase was a jump in clothing and footwear prices - especially women's clothes - with clothes rising around 6% between August and September, compared with a 3.3% rise over the same period last year.

With the average Cash Isa saver now losing money in real terms, for those prepared to take the risk, investing in the stock market seems like an option. Historically, investing in equities has provided the best chance of beating inflation over the long-term. Equities can grow their dividends and capital over time and this helps them to keep pace with rising prices. Obviously, however, stock market investments and their income can fall as well as rise in value so you could get back less than you invest.

For many, therefore, equity income funds remain popular amongst those prepared to accept the risks. They look to invest in profitable businesses that have the potential to grow their profits and dividends over time. Companies that achieve this are likely to see their share prices rise, which is why equity income funds offer the potential for both income and capital growth. Corporate bond funds are another option.

Of course, the suggestions mentioned above are not intended as personal financial advice.

To discuss the latest position and what the best financial options are personally for you, contact Kellands.

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