Good news and inflation haven’t shared an article for quite some time.
Today is unfortunately no different. A bulletin, released by the Office for National Statistics (ONS), reveals that the rate of inflation as measured by the Consumer Price Index (CPI) has risen to 2.9%, the highest level in nearly four years.
Relatively high inflation has been a recurring point of discussion since the start of the year, when it grew to 2.3% and showed no signs of slowing down. With a peak of 4.1% now predicted by the end of the year, who will be feeling the most deflated by this news?
People on fixed incomes
Those on a fixed income are first on the list of people losing out, such as:
- Retirees who have bought a level Annuity
- Employees experiencing a pay freeze
Level Annuities paying out a fixed amount, will stay the same regardless of the rate of inflation. Although you are technically being paid the same amount, the money is effectively worth less.
The public sector has experienced a pay freeze for over five years. In the private sector wage growth continues to lag inflation.
Savings accounts are traditionally used by people who want to protect their capital and are not prepared to expose their savings to the risks associated with stock market investing.
However, a combination of low interest rates, and relatively high inflation, introduce a further risk.
Any savings account offering an interest rate below 2.9%, which at the time of writing this is the vast majority, will result in a real terms loss. There are one or two exceptions to the rule. However, with the rate of inflation expected to continue rising, we can expect to see a time when no savings accounts beat inflation.
Becoming an investor instead of a saver could keep you one step ahead of inflation, but this depends on your personal circumstances, including your attitude to risk. Investments of any kind put your capital at stake, and you could end up with less than you originally had, making relatively high inflation the least of your worries.
Rising inflation affects us all, bringing along an added pressure to make our money stretch as far as it did previously. Inflation has long since surpassed the Bank of England’s 2% target, with political uncertainties, Brexit and increased food and clothing prices causing it to show no signs of stopping.