3 ways that sustained inflation could impact your wealth and what you can do about it


businessman organising his wealth on his laptop and taking notes

Inflation rates have been gradually rising over recent months, with experts predicting that the cost of living will continue to rise in 2022.

According to the Office for National Statistics (ONS), the UK inflation rate in October 2021 was 3.8%, an increase from September, when it stood at 2.9%. Inflation is at its highest point since November 2011.

The inflation rate is projected to remain about 4% in the near term, before reducing back to the Bank of England’s target inflation rate of 2%.

The rate of inflation can affect your finances in several ways, so read on to find out how, and what you may be able to do about it.

1. Inflation can raise your cost of living, and erode your savings

In simple terms, inflation is a measure of the rate at which prices rise. With the inflation rate at 3.8% as of October 2021, that means the average price of goods and services is 3.8% more expensive now than at the same time last year.

This means that the value of your cash savings could be slowly eroded. Indeed, according to the Bank of England inflation calculator, £100 worth of goods in the year 2000 would have cost an average of £172.13 in 2020.

For your savings to keep pace with inflation, you need to earn a similar amount of interest. However, since March 2020 the Bank of England base rate has stood at just 0.1%, meaning savings interest rates are at a historic low.

Indeed, a Guardian article from August 2021 claimed that one in eight easy access accounts were paying just 0.01% interest.

Low interest rates could mean that your savings are being left behind, growing at a fraction of the speed at which prices are rising. One of the ways to counteract this is to invest your savings instead.

Investing tends to outperform cash savings in the long run, although experts recommend that you leave an investment for a minimum of five years to give it ample opportunity to grow. While riskier, investing may help you to keep your savings in line with inflation.

Be sure to keep plenty of cash savings to hand, however, to ensure that you can cover the costs of any necessary or emergency payments that might occur while your money is in the market.

2. Your investment returns may not feel as impactful

Though investing tends outperform cash savings in the long term, it still needs to outperform inflation to prevent your wealth from losing value in real terms. If the inflation rate is as high as 4%, it’s going to be harder to reliably outperform it.

Let’s say your current investment strategy is returning an annual average of 2%. If inflation is at 4%, then your cost of living is rising by around 4% but your savings are only growing by 2%.

If your goal is to keep up with inflation and prevent the erosion of your wealth, you may want to consider revaluating your investment strategy. This may involve adjusting your risk tolerance or where your money is invested, in line with your financial goals.

3. Rising interest rates may increase your debt repayments

If sustained inflation reaches 4% as predicted, then the Bank of England may be forced to raise interest rates. Other institutions may then increase the interest rates they pay on savings accounts.

While this may help your savings gain a little extra boost, it may increase the interest rate on loans too. Lenders will typically raise their standard variable rate (SVR) when the base rate rises, while mortgage deals that track the base rate will go up automatically.

If you have a fixed-rate mortgage then your repayments won’t be affected immediately, but the “go-to” rate you may pay when your fixed rate ends may be higher.

One method of counteracting interest is to try and pay off any loans early. This prevents interest building up over a longer period and will save you money in the long run.

Be aware of any early repayment charges that may be in place, however, especially on bigger payments, such as your mortgage.

Contacting a financial adviser can help you prepare for economic changes

There is no better way to protect yourself against inflation than to speak to an expert. We can help discuss your options and identify ways to future-proof your wealth that works for you.

We are there to help both you and your finances. By contacting us, you can ensure that you will receive measured financial advice that takes your personal situation and expenditure into account.

To find out more about how we can help you, feel free to email info@investmentsense.co.uk or call 0115 933 8433.

Please note

Investments do not afford the same capital security as deposit accounts. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.