Inflation is still a threat – it may pay to play it safe

Questor Wealth Preserver: the Bank of England says inflation may stay higher for longer, but Lord Wolfson of Next sees encouraging signs

In this week’s update on our anti-inflation Wealth Preserver portfolio, we’ll first round up some of the latest indications about the likely future direction of the cost of living crisis and then look at the performance of those assets to have moved substantially in price in recent weeks.

As ever, the signals about where inflation is going depend on which news stories you happen to read. 

There was good news from the eurozone, where the annual rate of increase in the cost of living fell in December to 9.2pc from 10.1pc the previous month. Part of the reason is a continued fall in energy prices, helped by the mild winter weather so far and the success of the West’s efforts to counteract Vladimir Putin’s energy war.

Then the boss of fashion chain Next, Lord Wolfson, said he saw signs of a decline in inflationary pressures in his company’s supply chain

Next said it would put prices up by 8pc in the spring and summer of this year to maintain its margins, following similar increases in 2022, but expected to raise prices by just 6pc in autumn and winter.

Less cheerful was a warning from the Bank of England that Britain’s shrinking workforce risked prolonging inflation. A decline in the number of people participating in the workforce, particularly among those aged 50 to 65, is fuelling the tight labour market, according to Huw Pill, the Bank’s chief economist.

Inflation is a complex phenomenon: the supply of goods and labour, overall levels of demand in the economy, expectations about future inflation and economic prospects, monetary policy and the exchange rate are just some of the influences on the overall rate of price increases. 

As a result, arriving at a forecast that incorporates all relevant variables is difficult or impossible. We will therefore refrain from predictions.

In this type of environment, a widely diversified portfolio of assets remains our best bet. Here are some of the most striking recent developments among those held in our Wealth Preserver portfolio.

Gold has rallied strongly in dollar terms, from $1,627 in October to $1,896 now. In sterling, the change is much less spectacular, however, because of the recovery in the pound. Overall, the gold in our portfolio has gained 21pc since we bought it in April 2021.

Gilts have been gently declining since a peak in late November, when our 2036 index-linked issue reached £107.23; the price is now £98.38 (these are “clean” prices, which don’t incorporate the inflationary element and are hence a purer indication of investors’ sentiment towards the bonds). 

This follows the crash in gilts over the disastrous mini-Budget in the autumn, when the price of ours briefly touched £81.98.

Commodities, the only category of asset in our portfolio to have shone since its inception, have delivered a mixed performance of late. 

Shares in the lithium miner Sociedad Química y Minera de Chile, our best individual holding by a mile, have fallen from $111 in November to $85.31 now, although they are broadly flat over six months, while those in Antofagasta, the copper producer, have risen steadily from £10.63 to £17.63 over the past six months. 

Yellow Cake, the uranium storage specialist, has risen strongly from 326p to 397.2p over the same period, while the WisdomTree Aluminium exchange-traded commodity has risen more modestly from $3.25 to $3.49.

Shares in Admiral, the insurer, had been recovering nicely from lows of about £19 seen in October until a warning on the cost of weather-related claims from rival Direct Line on Wednesday sent its shares down by 6.6pc to £21.22. They have since recovered a little; we bought at £32.01.

Likewise WH Smith has staged a remarkable recovery from a low of £11.33 on Oct 12 to £15.70 now. This 39pc gain far surpasses the 14pc rise in the FTSE 100 over the same period. Our purchase price was still somewhat higher unfortunately at £17.63.

Finally, the Honeycomb investment trust added to the portfolio in October 2021 has now completed its merger with its management company under the name of Pollen Street. 

While this is not something we expected when we bought it, we will reserve judgment until the merger has had time to bed in. Assuming dividends were reinvested, the shares are 34pc down.

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.

Read Questor’s rules of investment before you follow our tips