Traditionally, 2% inflation has been seen as a manageable figure. The Bank of England has 2% as its target for a reason; it’s stable enough to keep the economy moving without eroding standards of living too dramatically.
Recently, however, 2% inflation has been an unachievable goal. The response to the Covid-19 crisis and other subsequent issues has caused the inflation rate in the UK to skyrocket to 5.5% in January, the highest figure in 30 years. This could be surpassed in the coming months, with fuel and food costs soaring, putting yet more of a pinch on UK household budgets.
The effect of inflation on savings
Inflation has a particularly detrimental effect on cash savings. Imagine, for example, you have £10,000 set aside. If the inflation rate stayed at 2%, you’d need £10,200 to have the same buying power after a year.
This may not seem like a significant difference but it’s cumulative. After 10 years of inflation at 2%, you’d need £12,189 to have the same buying power and this is before you even start thinking about increasing your wealth. Right now, almost no cash accounts offer an interest rate even close to this level.
According to some IMF estimates, we may be stuck with inflation figures way above 2% until 2025. This means that money held in cash deposits could lose a further 8.2% in real terms, even if it’s earning the Bank of England’s base interest rate.
As a result, it’s vital to have sound financial planning in place to stop your money’s buying power from simply withering away over time. One way of beating inflation is to invest in a stocks and shares portfolio. This does, of course, come with risks of its own, but these can be mitigated by taking a long-term approach to investing and by diversifying the portfolio as much as possible.
We recommend that anyone worried about rising inflation at least takes a look at their options; there is likely to be a portfolio out there that suits your goals.
Ultimately, inflation is an important part of a functioning economy. It is, however, a problem for anyone who prefers to keep their savings in the relative safe-haven that is cash. It may no longer be good enough to leave cash sitting in a low-interest account. Without the requisite returns, it’ll lose value over time to inflation and you’ll end up with less buying power than when you started.
If you have savings that you’d like to invest, don’t hesitate to contact our team before the end of the tax year.
