In recent months, as the country began to emerge from the final national lockdown and looked to move past the Covid-19 pandemic, there has been a spike in the inflation rate.
The latest figures from the Office for National Statistics (ONS) show that inflation rose to 3% in August 2021, a full 1% higher than the Bank of England’s target. This disparity is a worry for economists.
A little bit of inflation can be good for the economy as it encourages people to spend, but too much can cause significant economic issues.
You may be wondering how the recent rise could affect you and your wealth, as well as why economists are worried about it. Read on to find out the answers to these questions.
Inflation represents the rising cost of living
In simple terms, inflation is the rate at which prices rise. 3% is relatively high compared to recent years, and it means the average price of goods and services in the UK is now 3% higher than the same time last year.
Considering that this price increase builds up year after year, the cost of living can rise significantly over time. The Bank of England’s (BoE) inflation calculator estimates that £100 worth of goods and services in the year 2000 would have cost £172 in 2020, due to an average annual inflation rate of 2.8% over that period.
Each year, the BoE has a target inflation rate of 2%, which can help to stimulate the economy and help people to plan their finances.
However, if the inflation rate is too high, it increases the speed at which the cost of living rises and how quickly your savings can be eroded. If it’s too low then it represents a reduced demand for goods and a poor economic performance, which could limit wage growth.
However, economists are worried not just because of the gradual erosion of people’s wealth, but because of the risk of “stagflation”. This is a portmanteau of “stagnant growth” and “inflation”.
This means that while the economy experiences very little growth, the cost of living continues to rise.
The ONS report that UK unemployment reached a peak of 5.2% between October and December 2020, the highest it had been since August to October 2015. The UK’s GDP also dropped during the pandemic to its lowest point since 2003 according to the ONS, disrupting a steady increase.
Poor economic performance, high levels of unemployment, and a high rate of inflation could prove difficult for a lot of people. If you’re concerned about it affecting you, you may be wondering what you can do about it.
Investing your money could help you protect against inflation
By keeping your savings in cash savings accounts with low interest rates, you may be limiting the potential of your wealth to grow.
Interest rates for things like mortgages, loans, and savings accounts are currently at record-lows because the BoE base rate is at only 0.1%. This is the most influential interest rate in the country, as it affects the interest rates offered by other banks and building societies.
According to MoneySavingExpert, the highest interest rate currently available on an easy access savings account is 0.65%. Furthermore, the highest easy access interest rate available through a high-street bank is 0.45% with Nationwide.
Since inflation is at 3%, it’s clear to see that your money will be growing at a much slower rate than the cost of living.
One method to potentially protect your money from inflation is to invest your savings instead. This can help your money to grow more effectively, depending on the performance of the assets you invest in.
Experts typically recommend investing for a minimum of five years, as this increases the likelihood of seeing returns. That being said, it’s important to remember that the value of your investments can go down as well as up.
One easy method of investing is to open a Stocks and Shares ISA, which enables you to invest your money into a range of shares and bonds across the globe.
Moneyfacts found that, from March 2020 to March 2021, the average growth of a Stocks and Shares ISA was 13.55%, while the average interest rate of a Cash ISA over the same period was just 0.63%. Remember, however, that past performance is not necessarily indicative of the future.
Of course, it’s important to remember that, since cash offers more security than equity investments, it can be useful to hold in the short and medium terms. This is why, while investing can be useful, some experts believe that keeping a portion of your wealth in cash can be an important part of your financial plan.
Seeking professional advice can be useful if you’re thinking of investing
Deciding whether to invest is no easy decision. Though it offers the potential for your money to grow, market volatility could see the value of your investment rise and fall.
However, with a high inflation rate, now might be a good time to try and bolster your savings for the future. If you’re wondering whether investing could be right for you, or are unsure of how to go about it, you may benefit from seeking professional advice.
Working with an adviser can help you to discover your risk tolerance, as well as working with you to decide on your investment goals and helping you to develop a plan to get there.
Get in touch
If you’d like to find out more about how investing can help to grow your wealth, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
Please note:
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.
