If inflation were to average 5 per cent in the future, the real purchasing power of your money would halve within 14 years.
This might please government ministers who are keen to keep their debt bill down, but it would be a major worry to charities mindful that the annual rise in the retail price index in 2010 was 4.8 per cent.
In March last year, the National Council for Voluntary Organisations published a document suggesting that inflation led to a lower level of donations in real terms. It noted that donors tended to give in round amounts and that 31 per cent of donations came from people who used a regular method of giving - the implication being they would take time to adjust their monthly payment.
Is inflation here to stay? The Monetary Policy Committee assesses what it thinks will happen over a 24-month period and, whereas it expects inflation to stay high for the next 12 months, it predicts a fall thereafter. The problem is that costs are still rising for British businesses. Inflation can become ingrained in the system because workers want to see their wages rise in line with inflation. So although inflation might not stay above 5 per cent for a prolonged period, it does feel like a factor that charities need to protect themselves against.
Charities need to ensure their income rises in line with inflation. One way is to invest in 'real' assets, such as property and equities. These work because, as inflation rises, so does income: UK companies, for example, can raise their prices and protect their profits; similarly, landlords can push up their rents; and, with assets such as index-linked gilts and infrastructure projects, the income payments can be linked to an inflation index.
Charities considering these options should assess whether the potential income is projected to rise in line with predicted inflation. For example, assets targeting a nominal return, such as cash, bonds and absolute return funds, are likely to be a less natural home for charity investments than real assets such as property, equities and index-linked gilts.
So although charities will generally suffer from a return to inflationary conditions, those with income that comes primarily from investments can take steps to protect themselves.
- John Hildebrand is an investment manager at Rensburg Sheppards