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Inflation remains well ahead of the Bank of England target

Inflation remains well ahead of the Bank of England target

The Office for National Statistics has confirmed that inflation, as measured by the Consumer Prices Index grew by 2.8% in the year to July 2013, down slightly from 2.9% in June but still well ahead of the Bank of England target rate.

The public should take note before rushing out to buy yet more residential property assets on historically high multiples of average earnings: despite last week’s forward guidance by the Bank of England signalling that ultra-low interest rate could be here to stay for years yet, there are caveats allowing the Bank to change course. A key one being forecast inflation for the next 12/18 months being 0.5% ahead or more of the Bank’s official 2% target.

As for savers, they have been hit with four and a half years of record low interest rates, with rates on Cash ISAs and savings accounts squeezed by the Funding for Lending scheme. Yet despite real returns being negative on cash accounts, 80% of the 14.6 million ISA accounts subscribed to last year were invested in cash. Cash simply isn’t king in the current environment of low rates and above target inflation.

While we all need some cash reserves for short term needs and emergencies, we believe that investors with a reasonable time horizon should look to shift some of this into riskier assets where there is a prospect of a real return after inflation.

 

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