How can bond investors offset inflation?

Manager of the Insight Inflation Linked Corporate Bond fund

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Insight's David Hooker
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Insight's David Hooker

It is little wonder that investors with bond allocations are keeping a watchful eye on inflation given that the consumer price index (CPI) surged to 2.9% in May, well above the Bank of England's 2% target.

Bonds typically pay a regular level of income, meaning inflation has the potential to significantly reduce the return on fixed income investments. Inflation also undermines the value of retirees' savings as well as cash deposits at a bank, which already earn little in the way of interest. At the May meeting of the Bank of England, its Monetary Policy Committee ultimately kept the key interest rate at 0.25%, yet the 5-3 split vote among policymakers was the closest margin since 2007. It was also an unexpected swing from the previous meeting, where there was a more one-sided 7-1 split vote...

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