Soaring inflation has been wreaking havoc on people’s savings and livelihoods the world over. In the US, UK, and EU, the respective central banks have embarked on aggressive interest rate-hiking campaigns to temper inflation. Although their efforts have been met with some success, inflation continues to be much higher than central bank targets.

Inflation in the UK

According to the Office for National Statistics, the consumer price index rose by 8.8 percent over the 12 months ending with January 2023. In December 2022, that number was 9.2 percent. Costs related to housing and household services powered inflation, although food and non-alcoholic beverages pitched in as well.

Both the Consumer Price Index and the Consumer Price Index for Housing skyrocketed starting with March 2021. Only the Owner Occupiers’ Housing costs saw a slower rise meaning housing costs-related inflation doesn’t impact owners as much.

Inflation in the Eurozone

In January 2023, Eurozone inflation was at 8.6 percent. A heterogeneous patchwork of different countries and cultures, the Eurozone is a display case of diversity regarding inflation rates as well.

Latvia, Estonia, and Lithuania have experienced staggering inflations of 21.4 percent, 18.6 percent, and 18.5 percent, respectively. At the opposite end of the inflation spectrum, we have Luxemburg with 5.6 percent and Spain with 5.9 percent.

The main contributors to skyrocketing Eurozone inflation are food prices, followed by alcohol and tobacco prices. Fuel and energy prices have exploded as well, although they have been kept largely under control through a patchwork of government interventions and consumer protection measures.

Given that the inflation target of the European Central Bank is 2 percent, even the lowest range of Eurozone inflation is scary.

Inflation in the US

Compared to the UK and the Eurozone, the US has been more successful in combating its own runaway inflation. In January, the inflation rate was “barely” 6.4 percent.

To learn whether the interest rate hikes of the Fed do, indeed, work, we’ll have to wait until March 14, when the data concerning the twelve months ending in February becomes public.

The CPI rarely reflects the real inflation rate, however. In many economic sectors, the inflation rate outpaces the CPI.

What Fighting Inflation Means for UK Investors

Central banks attempt to rein in inflation through a series of interest rate hikes. Increasing borrowing costs cool economies and boost the value of the available money.

The BoE has been trying to combat inflation through its interest rates like the Fed and the ECB.

Interest rate hikes have become the norm. After a recent US Federal Reserve meeting, in which fiscal policymakers suggested they may raise rates again, British investors priced in a 0.25 percent interest rate hike from the BoE on March 23.

The upward pressure on interest rates has been increasing as inflation has proven resilient.

Investors think the odds are 90 percent in favor of a 0.25 percent BoE interest rate hike. Some now believe the central bank may even boost borrowing costs by 0.50 percent to 4.50-4.75 percent.

The factor that triggered the bold interest rate hike predictions was Fed Chairman Jerome Powell’s comment about how the US would need to take stronger action in the way of interest rate hikes in light of new data.

Interest rate-sensitive 2025 British Government bonds have seen their yield reach the highest level since the fall of 2021.

For a short while toward the beginning of February, it looked like the BoE may have succeeded in reining in inflation, and its interest rate-hiking would fizzle out. JP Morgan analysts now believe that BoE will have to revise its labor market, growth, and inflation forecasts.

The peak interest rate analysts now expect is 4.73 percent by September.

The ECB has undertaken similar inflation-taming measures at the beginning of February. It raised its borrowing costs by 0.5 percentage points. The next interest rate decision for the Eurozone comes on March 16, and the ECB has already signaled its intention to stick to its current inflation policy and boost interest rates by a further 0.5 percent.

On the one hand, the ECB aims to temper inflation. On the other, it looks to discourage the development of a persistently upward inflationary expectation that may skew markets and rile investors.

How Do Rising Borrowing Costs Impact UK Investors?

Higher borrowing costs mean opportunities and challenges for investors. The main goal under such circumstances is to earn returns that exceed the rate of inflation.

Some investment funds handle rising interest rates better than others. Cautious investors look to avoid certain types of investments exposed to the caprices of inflation rather than find more resilient opportunities.

Those who seek to protect their investments steer clear of bonds. The current inflationary environment has bitten into bond prices.

Traditional “growth” stocks, such as technology, consumer discretionary, and communication stocks also suffer from rising interest rates. The valuation of such stocks hinges on expected future earnings, and these earnings don’t take well to rising borrowing costs.

Novice investors with modest portfolios should look for funds that offer them exposure to large UK-listed companies with international operations for a reasonable cost. The iShares Core FTSE 100 UCITS ETF is such an option. It offers a 4 percent yield.

Cautious investors looking to defeat uncertainty and inflation can turn to something like the Personal Assets Trust Plc. Such a conservative approach can earn investors a 26 percent return over five years while keeping their capital safe.

TM Redwheel UK Equity Income is an option for investors and income-seekers. The fund invests in large UK companies, protecting against inflation and high interest rates. It may soon offer exposure to exciting technology stocks as US firms may infiltrate its constituents through acquisitions. The UK market may lack exposure to high-potential tech companies. And lingering Brexit fears may render it unattractive for investors. It can, however, offer UK investors some solid options in a high-inflation, high-interest rate environment.

James West has more than 15 years of experience writing about finance and particularly cryptocurrencies, covering emerging tech, trading and industry trends.

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