Can you imagine what it’s like to live with a 50% annual inflation rate? I don’t have to imagine it because I’ve experienced it, living in Argentina.

To be clear, I’m not predicting that the UK will suffer anything like this any time soon. But there are still lessons to be drawn from the experience, and what ordinary people do to protect themselves in such circumstances.

I do expect inflation to increase in the UK from the low levels of recent years. For a variety of reasons, conditions are now ripe.

In particular, one crucial inflationary force has lain dormant since the global financial crisis (GFC). But the situation has changed, and it could spring back into action this year and beyond.

I haven’t seen it mentioned anywhere in the mainstream media. That’s simply because very few people understand it. But I’ve recently explained what’s going on to subscribers to UK Independent Wealth.

But back to Argentina and the lessons I learned from observing high inflation there.

A long history of monetary inflation

To understand how people cope with high inflation, it’s important to know a bit about the hard lessons that its victims have suffered.

Argentina has a long history of high inflation. According to Trading Economics, Argentina had an average inflation rate of 193% a year between 1944 and 2021.

In March 1990, the annual inflation rate peaked at a staggering 20,263%. Put another way, over the preceding year, consumer prices rocketed by more than 200 times, measured in the local currency. That was a true hyperinflation.

Argentina has a long history of a weak and depreciating local currency. It’s currently called the peso, and it goes by the extremely appropriate, three-letter international currency code of “ARS”. (The UK pound sterling is GBP and the US dollar is USD.)

My first ever visit to Buenos Aires happened to be in August 2002, just after a major financial crisis. I had an Argentine girlfriend that I’d met in London, where she was studying, and was invited to visit her hometown. The government had defaulted on its debt (again) and the currency had collapsed (again).

Obviously, the place was depressed when I arrived. It was mid-winter by then. The fronts of bank branches in the financial district still bore the scars of riots.

I still have a pair of leather ankle boots that I bought at the time. They’re great quality and I still wear them regularly. If memory serves, they cost me about £20 pounds. That’s not bad for 19 years of faithful service.

To cut a long story short, I ended up moving to Argentina in September 2008. My girlfriend had become my wife, and I now had two kids as well.

This was an ultra-contrarian decision. I was moving to a country with a long history of major financial crises. The difference was, this time, that it was the rest of the world that was entering a crisis too.

I’ve kept a copy of the Financial Times from 30 September 2008, bought at Heathrow before boarding the plane. The headline reads: “Stocks dive on bail-out rejection… S&P 500’s worst day since 1987.” I keep it to remind me that anywhere can go into financial meltdown.

At the time, one US dollar bought about 3.1 pesos. The official inflation rate was heavily manipulated by the government, but I estimated it at around 15% a year. That rate would be a shocker for developed countries, but it was low by Argentine standards.

That didn’t last.

As of today, the official exchange rate is about 94.3 pesos per dollar. In other words, a dollar will buy over 30 times as many pesos as in September 2008. The peso has lost nearly 97% of its value against the dollar in less than 13 years.

Officially, Argentine consumer prices rose by 46% in the year to April 2021, measured in pesos. That is much lower than the long-term average, but still a hefty rate. It has been at similar levels for the past five years or so.

What does the government do to fix the problem?

You’d think that the government would do something to fix this. In reality, they never get to the root of the issue, which is massive money creation by the central bank (sound familiar?) or the commercial banks.

Instead, governments use a lot of short-term patches that make the situation worse. In the end, this creates even bigger problems.

These patches include tight capital controls, export bans, import controls, extra taxes, restrictions on foreign currency purchases, price controls (food and utility bills) and so on. It would require a whole essay just to explain it all.

Of course, none of it works. It’s just the equivalent of anti-inflation “whack-a-mole”.

The government uses a hammer to bash down one set of prices. But other prices just pop up their heads instead.

Prices for particular goods or services may rise more slowly for a while, but the fundamental problem remains. The excess money supply is still there.

What the locals do to protect themselves

None of this is new. Successive governments have tried the same sorts of things again and again, over many decades. They never learn… or maybe it’s just easier to hit the system with a hammer than to fix the internal mechanism.

The result is obvious. A hundred or so years ago, Argentina was a rich country. There was even a saying to describe people that were loaded. They were said to be “as rich as an Argentine”.

Sadly, that is no more. The remaining middle class is a shadow of its former self in terms of wealth and poverty is rife. The inflation tax has played a large part in gutting people’s wealth.

But not everyone has suffered. By now, anyone with a pulse knows how to protect themselves, at least in theory.

The basic priority is to get rid of any excess pesos at the first opportunity. The exact route depends on the quantity of funds each person has available.

Here are some of the things people do to protect themselves from Argentina’s rampant inflation:

  • Buy non-perishable consumer items early and stockpile them. In the past, I’ve witnessed people storing large quantities of tinned food, beer, wine and such like.
  • Buy foreign currencies, especially the US dollar, which is widely accepted in Argentina. Some people are prepared to pay a large premium to do this – at times as much as 70% above the official exchange rate. Even kids are taught to convert their savings from a young age. Because the peso is so weak, dollars are effectively Argentine “gold”, even though dollars also lose value over time (albeit much more slowly). I have American friends who say they never saw a $100 bill inside the US, but encountered loads of them in Argentina.
  • Buy physical assets that will keep their value. This ranges from a few bricks for a planned future house extension (until you have enough to start construction), to a space in a parking garage, to a rental property (flat or house), to farmland. It’s not about expecting the price to go up in future. It’s just knowing that it will still be there in ten years. A house is a house.
  • Buy art and antiques as a store of value. Eventually, they can be sold when people need the money, such as in retirement. I know people who have done this.
  • Buy gold coins or antique jewellery for the same reasons. Somewhat surprisingly, Argentina doesn’t have much of a gold market. I suspect that that is because the government could seize stock. But some people still find a way to go down this route.

The common thread is that Argentines know that their local money rapidly loses value over time. So they get out of it in any way that they can.

What UK investors can learn from Argentines

I certainly don’t expect the UK to experience Argentine-level inflation any time soon. But I do expect prices rises to accelerate this year, and maybe beyond.

Let’s say, for the sake of argument, that UK inflation averages just 4% a year over the next decade, which is twice the Bank of England’s target. That’s perfectly possible. It’s certainly not outlandish.

At that rate, the pound would lose nearly 34% of its purchasing power over ten years. Investors in ten-year gilts – UK government bonds – would also lose a lot. Those bonds currently yield less than 0.8% a year, well below the 4% inflation in this scenario.

Many personal pension funds are stuffed with a high allocation to such bonds. Maybe yours is too. Are you aware of the risk?

The challenge is to find investments that stand to do well in such an inflationary environment. That’s a large part of my focus these days. Gold clearly plays a part. So do certain shares of companies, with the right attributes.

If you’d like to find out more – including my recommended best ways to buy gold – I encourage you to take a look at UK Independent Wealth.

The risk of rising inflation is plain to see. It may last for many years.

I don’t expect the situation to be as extreme as Argentina. But I certainly plan to invest according to the lessons I’ve learnt there.

Rob Marstrand
Investment Director, UK Independent Wealth