APU: June 23: Inflation-proof investments

Investments, always subject to a variety of risks that can impact their value, are never safe.

For example, the value of your investment could decline due to the performance of the company you invested in. If you hold fixed-rate bonds, a spike in interest rates could cause the value of your investment to fall, as demand switches to higher rate bonds.

But another investment risk has once again reared its head: high inflation. Usually measured as the average increase in consumer prices over a year, inflation erodes spending power if income or returns do not keep pace.

So, a fixed-rate bond that pays 2% would actually depreciate in value in a year where inflation runs at an average rate of 3% — despite the numbers in your bank account ticking upwards.

In the 12 months to March 2023, inflation hit 10.1% and, according to the Office for Budget Responsibility (OBR), will average 6.1% for 2023.

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