Start Thinking About Protecting Your Portfolio Against Inflation

Many influential figures are speaking out about the risks of inflation, and maybe it's time to listen to their voices. Last week Jens Weidmann, the Deutsche Bundesbank chief, warned of the dangers of complacency, comparing inflation to the Galapagos giant tortoise, which was classed as extinct for a century, only to be rediscovered.

Andy Haldane - the Bank of England's chief economist - is even more concerned, issuing an alert about the threat of rising prices as he left his job last week. He says: 'Inflation always starts looking temporary but can end up as the thin end of a very thick wedge.'

A big bout of inflation has the potential to seriously damage your wealth.

Yet other members of the Bank's rate-setting monetary policy committee say spikes in inflation will be 'transitory'.

Not everyone is content with these reassurances, however, believing that record low interest rates and the money-printing quantitative easing programme will cause overheating of the UK economy – which is rapidly rebounding from its Covid doldrums.

The $1.9trillion US stimulus package could add further pressure – in the US, and around the globe. Research from US fund manager Brown Advisory shows bonds and stocks do well if inflation remains below 5 per cent. But if inflation is above this level, performance flags.

Duncan MacInnes, comanager of the Ruffer Investment Trust, says investors should heed the everyday evidence that the cost of living is going up. He says: 'Covid has propelled us into a new economy. Inflation is accelerating and has permanently shifted to a higher level. The damage to a conventional portfolio could be profound and painful.

The effect of inflation on cash and bonds is like the melting of an ice cube that has been left out. If inflation runs at 3% a year, your money's purchasing power would have halved in 20 years.