The latest inflation print for the UK came out today (14 August). It showed that for July, inflation actually rose from the 2% print from June to 2.2%. Even though this is the case, it was still below the 2.3% that most analysts were expecting.
Yet at 2.2%, if I leave my money in my current account, it’s still getting eroded in value. Here’s how I’m making use of UK stocks to solve this problem.
Investing with inflation in mind
It’s hard to perfectly beat inflation because it’s a constantly changing figure. However, thanks to the higher interest rates, inflation has been moderating here in the UK. Through to the end of the year, I expect it to be in the 2%-3% range. On that basis, I can be reasonably confident that if I can invest my money and achieve a return higher than this, I can say that I’m beating inflation.
Inflation is almost invisible in eating away my returns. Let’s say I buy a stock that appreciates by 5% in the next year. I need to be aware that my real return is less than this. As we currently stand, my real return would be 5% minus 2.2%, so 2.8%. This is important as although inflation is a hidden cost, but I still need to account for it.
One of my favourites
There are two main ways that I’m trying to beat inflation both now and in the future. One is making use of stable stocks that have both income and growth potential. For example, I currently own shares in the iShares Core UK Gilts ETF (LSE:IGLT). It’s a fund that’s traded on the stock market that mostly holds UK government bonds.
Over the past year, the share price is up 5.7%. It also pays out the coupons from the bonds as a dividend. This is done on a semi-annual basis, with a current distribution yield of 2.41%. When I combine the two, the total return over the past year has been over 8%.
UK government bonds are a very safe investment in my view. The chances of default (and therefore a share price fall) are very low. This allows me to invest with confidence going forward, that my returns should be consistent.
However, the risk is that this idea is never going to make me millions. The fund isn’t magically going to appreciate by 100% in a great year, or pay out a dividend that equates to 10%+. The nature of the underlying assets (i.e., bonds) means that this is different to a traditional UK stock. Yet for the purpose of trying to get a real return, I really like having it in my portfolio.
Capital gains
The other angle is to buy growth stocks that don’t pay out income, but could offer large capital appreciation. This is more risky than my other idea, as there’s no guarantee that my picks will increase in value. However, if I’m wanting to smash inflation out of the park, there are some clever ideas I can use.
Although I don’t currently own the stock, I think Auto Trader Group is a good example. Over the past year, the share price has jumped by 28%. With a rosy outlook ahead, I think it could continue to rally.
