The good news for income investors is that inflation is, in fact, going down. The bad news – it still isn’t low enough.

According to a research note from stockbroker Redmayne Bentley: “The persistence of inflation within an economy can have a serious impact on an individual’s real rate of investment return.”

The note cites the example that should CPI inflation run at three per cent for 10 years, £1,000 in cash today will be worth just £744.10 in 2023.

Alex Hoctor-Duncan, head of retail EMEA at Blackrock, says: “There is no doubt that inflation will erode investors’ purchasing power. Even at the relatively low inflation rate of 3 per cent, assuming no interest return for simplicity, £100,000 will be worth the equivalent of £47,761 in 25 years’ time in terms of purchasing power.”

Mr Hoctor-Duncan explains that those investors that have left money in cash because of the “instability and uncertainty of investment markets”, holding too much for too long is not a wise move “given the erosive effects of long-term inflation”.

He adds: “That’s why investors may need to re-evaluate their attitude to risk and rethink their portfolio. No matter what their long-term objectives are, investors may need strategies that go beyond cash to achieve them and preserve the real value of their savings. In seeking higher returns, there is of course the need to also accept a greater risk of capital loss.”

While the fixed income asset class has been the traditional hunting ground, particularly in the past 12-18 months as bond yields were on an upward trajectory, this area has come under significant pressure causing income investors to have to widen their search.

Martin Walker, UK equities fund manager at Invesco Perpetual, explains: “Equities, with share prices driven by nominal earnings growth, are a much better bet than bonds in an inflationary environment.”

And Ben Yearsley, head of investment research at Charles Stanley Direct, agrees: “Equity income is one of the most popular forms of investment. The premise is simple. Invest in dividend-paying shares to provide you with a rising income stream, or, reinvest that income to produce powerful compound growth.

“There are many choices in this popular sector - nearly 100 UK funds plus those investing in high yielding shares overseas, both regionally and worldwide. Some are naturally more defensive, others more aggressive, perhaps including higher risk smaller firms.”

Creating a well-diversified income portfolio can be tough, and Mr Yearsley argues that “unless you are confident choosing your own companies, and have a sufficiently large portfolio to provide diversification, I believe using equity income funds is a sensible choice”.

Jenny Lowe is features editor at Investment Adviser

INFLATION – AN UNWELCOME SHOCK

Ben Lord, portfolio manager at M&G Investments, says:

“In spite of high unemployment rates, excess capacity and a sanguine inflation outlook from the major central banks, it is important to keep an eye on any potential inflation surprises that may be coming down the line.

“For instance, we only need to look at ultra easy monetary policy; low interest rates and improving economic growth to see that the risk of an unwelcome inflation shock is higher than perhaps at any time in the past five years.

“The development of forward guidance measures is a clear sign that central banking has evolved substantially from 2008 in the form of Central Bank Regime Change.

“It appears that there is a growing consensus that inflation targeting is not the magical goal of monetary policy that many had once believed it to be and that full employment and financial stability are equally as important.”