Charities urged to protect their asset base against inflation
April 2010
The unexpected spike in UK inflation released this week raises the issue of long-term protection of charity asset bases.
Azad Zangana, European economist at Schroders, explains:
‘Annual consumer price inflation (CPI) jumped from 3.0 per cent in February to 3.4 per cent in March 2010 - well above consensus estimates of 3.1 per cent. The sharp pick-up is largely attributed gas price falls in March 2009, which were not repeated this year. It is worth noting that some major gas suppliers did cut their prices in April, and so we could see some downside surprise next month. Though the gas price story is an important contributor to this morning's surprise, weakness in sterling also appears to be forcing firms to raise prices on their imported goods. This is noticeable from core inflation which also came in higher than expected (3.0 per cent v consensus of 2.8 per cent). The retail price index (RPI) followed the same pattern as the CPI index, rising by more than expected from 3.7 per cent to 4.4 per cent in March.
‘There were signs that some retailers who had not fully passed on the cost of VAT being re-instated at 17.5 per cent, did so in March. The CPI excluding indirect taxes index (CPIY) rose sharply from 1.4 per cent to 1.8 per cent in March on an annual basis. ‘This morning’s shock marginally raises the likelihood of interest rates being raised sooner than the market anticipates, causing sterling to rise almost a cent against the US dollar in reaction to the release. However, we expect the Bank of England to treat this as a one-off spike and focus on the broader picture which is one of slowing inflation over 2010. Our rates view is unchanged: Bank of England to keep its policy rate on hold until the fourth quarter of this year.
'News of higher inflation may come as a blow for Gordon Brown's efforts for re-election. Higher inflation over the first quarter of this year may mean that GDP growth in real terms released later this week (23rd) may disappoint.’
Giles Neville, the head of charities and the investment firm said he was aware of many charities who hold large cash balances or whose assets are not structured to protect against inflation. 'Cash rates are currently well below the rate of inflation, ensuring that charities who hold cash are not maintaining their purchasing power. We believe it is important to structure longer-term investment portfolios to protect against this inflation risk and ensure the sustainability of the assets and expenditure', he says.
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