Market Update • 13 June 2025
We were approached by an FT journalist last week to give our thoughts on what to do about inflation.
Award winning journalist Moira O’Neill wrote to me asking what I think about the chances of inflation spiking during a 20–30 year retirement, whether it’s worth going for an escalating or RPI-linked annuity instead of a level one (and if so, when), and whether other options like inflation-linked bonds, gold, or a higher equity allocation might be better. She’s also unsure how much we can rely on the state pension triple lock in the future.
Nick and I wrote back… chapter and verse!
Why Inflation is Back in The News
It does not surprise me that inflation is back on everyone’s mind. The ‘cost of living crisis’ has been high up on news reels of late – the BBC even gave it its own section on their website at one point, although it has been taken down now.
Inflation took off in the spring of 2021 as we emerged from Covid and added 20% to UK prices (CPI) in under 2 years. It peaked at 11% per year, a rate not seen since the 1980s. It had been benign for much of the previous 20 years, running at 2% per year and under. There was almost no inflation between 2013 and 2016, nor between 2018 and the start of 2021.
Whilst the post-Covid inflation did quickly come down, it feels like inflation is out of the box again – the last annual figure for April this year was back up to 4.1%. If 2% inflation roughly halves your money’s purchasing power in 36 years, 4% inflation will do it in 18 years. It must be considered in any long-term planning.
Then there are the burgeoning levels of Government debt around the world and particularly in the US (with Trump’s ‘Big Beautiful Bill’) to consider. Steady inflation will be one way for Governments to reduce these debts in real terms.
I won’t discuss annuities again here, as I think I’m preaching to the converted. Suffice to say I just don’t think they are great products for modern retirement, which is typically longer and with more varied capital and income needs than 50 years ago, when they were the dominant financial product at retirement. Plus, they are still expensive relative to bond yields, and you need exceptionally good longevity genes to consider one.
Below is what we said on investments for retirement.
Which Investments We Don’t Think Work
Moira listed Inflation linked bonds, gold, and high equity content portfolios to potentially mitigate inflation. These each are worth a discussion to explain why we are NOT using these strategies or investments.
Gold
Gold is a speculative asset, and it has been ‘running hot’ of late, driven by investors seeking a safe haven from global uncertainty. Gold prices peaked this year at over $3,300 per ounce – that’s 65% up on the last price on the chart below! However, owning gold produces no income, so to use it in drawdown you are effectively betting on someone buying it back from you in the future at a higher price. It is a high-risk strategy, especially with today’s elevated price.
Whilst it has a reputation for protecting against inflation, it did not do that in the 1980s when inflation really took hold. The chart below shows that, after inflation, returns were strongly negative in real terms for more than 20 years between 1980 and the early 2000s. This could easily be the case again if the current demand for gold wanes.
Inflation Linked Bonds
Whilst there are a just a few Inflation Linked Corporate Bonds, the main market in Inflation Linked Bonds is in Index Linked Gilts, or UK government bonds. These would seem like the obvious panacea, but Index Linked Gilts are complicated to understand and don’t behave as people expect. In 2022 when inflation went up, index linked gilts went down.
The chart below shows that, counterintuitively, Index Linked Gilts have done worse than conventional gilts when inflation and interest rates have risen.
The population of Index Linked Gilts available to invest in are generally long in duration and nominal yields were exceptionally low by the end of 2021. As bond yields have generally risen, Index Linked Gilt capital values have cratered and would fall again if longer duration bond yields went up further.
High Equity Content
Like gold, equities are generally considered good investments to mitigate inflation, but again it is not quite as simple as that.
The type of inflation matters when evaluating the performance of equities. When inflation is driven by demand, we usually see economic growth and inflation rising together, which is generally good for equities. However, if it’s the wrong type of inflation driven by supply shocks, where rising inflation coincides with slowing growth (such as may be induced by tariffs and trade restrictions that dampen economic growth but simultaneously push up costs), this type of inflation is usually negative for equities.
So, it’s not a sure thing that we have the right inflation for great equity returns. Plus, we have the relatively high valuations and low dividend income of the very big US tech stocks dominating global indices and the volatile nature of equity markets. Great when you are accumulating and buying into dips, but not so good when you are de-accumulating and need to convert capital into cash flow.
Investments We Do Think Work
Whilst we should be thinking long term about all this, I do think we need to differentiate between pre- ‘the Liz Truss moment’ and post- ‘the Liz Truss moment’. Not that I assign great relevance to Liz’s tenure or actions, but they just happen to have coincided with the ‘big adjustment’ in bond yields as inflation and base interest rates rose.
We are now in a completely different world to zero deposit interest, 1% mortgages, and negative real yields on much of the bond market. This era is over, and it does not look like we are heading back to it anytime soon.
The chart below looks at cash deposits (D), our High Yield Fixed Income (A), Equity (B) and Balanced Multi Asset (C) portfolios versus CPI (E) in the almost two and a half years of the new era since the start of 2023.
So far, cash deposits before tax have beaten inflation, although there are strong risks that this won’t continue. If economies slow and employment weakens, the first thing that will happen will be base rates and deposit rates will fall. It’s been happening slower than people expected and economies have been quite resilient; there are just signs now that things might be beginning to soften a bit. The UK base rate is still 4.25% and just a pinch above inflation.
Equities are ahead of inflation but have been volatile. We expect this to continue. We are working hard to position our equity investments to take advantage of undervalued areas of the market and companies with inflation resilience, such as infrastructure, which is currently doing well.
Our fixed income funds are doing the heavy lifting, providing a return substantially ahead of inflation and far smoother than equities. Note that these funds are predominantly invested in corporate bonds, not government bonds. We are not too worried about default risks and the corporate bonds give us that premium return to stay well ahead of inflation.
These bond funds are also largely short duration, so if bond yields go up even further (which to us does not seem out of the question, especially if inflation stays higher) then the managers will be able to reinvest funds at higher rates in the future.
The chart below shows historic long term gilt yields. We are back up to 5.2%, which is getting back towards the long-term average. However, this would not be considered a high yield in the context of the last 125 years and particularly for periods of higher inflation, there is room for a bigger yield still to come.
Fingers crossed we get some exposure in the FT tomorrow 😊.
Below, Nick Gait looks in more depth at our top performing equity fund for 2025 so far, Artemis Global Income – how have they been doing it? We always ask a lot of questions when performance is this good and Nick has been in significant dialogue with the fund managers in the last few weeks.
Defence stocks have been a theme for this fund for several years, helping drive performance, and Stephen O’ Sullivan writes on continued developments in the various global conflicts currently unfolding.
