Inflation warning for cash holdings

Nella Correia

Private Client Adviser, Surrey

The Financial Conduct Authority (FCA) has recently published rules which require firms to provide warning to clients who hold certain levels of cash or cash-like funds for a sustained period of time. The cash warning highlights how inflation erodes the value of cash investments. The new FCA rule is intended to prompt consumers to consider whether they should remain in cash or switch to growth assets.

It is thought that consumers collectively hold around £1.5 trillion in savings accounts. Individuals rely on savings products to help meet financial goals from having an easy access cash reserve account for short-term needs or locking money away for the longer term. Especially with a higher cost of living, savings are an important source of financial resilience against high-inflationary pressures.


In the UK, inflation is measured by the Office for National Statistics (ONS) by pricing a ‘basket of goods’ and releases its measure of inflation each month showing how much prices have risen since the same date last year; this is referred to as the Consumer Prices Index or CPI. The latest figures show that CPI rose by 6.8% in the 12 months to July 2023, down from 7.9% the previous month. While this is down from the 41-year high of 11.1% recorded in October 2022, CPI remains painfully elevated and well above the Bank of England’s (BoE) target of 2%.

How does inflation affect holding cash?

Inflation and savings do not work well together and if you hold cash in a high-inflation period, you are passively losing money. However, everyone needs cash set aside as an emergency fund. Earning interest can help counteract inflation, if the interest is high enough, although not a long-term solution for growth.

Origen’s views on cash

Our views on cash return assumptions and cash investment thoughts are that while inflation remains well above the BoE’s 2% inflation target, further increases in interest rates could be announced. Although, in the short-term, the return on cash is well above the BoE’s inflation target (and Origen’s 2% assumption). It is important to remember that this is a long-term view where there will be periods of out and underperformance of this figure.

Inflation is expected to ease during the second half of this year and we have already seen the figure moving down in June and July 2023; as we move into 2024, the future path of the interest rate is likely to be clearer. The short-term return on cash is currently attractive, particularly if the deposit is fixed over a certain time period. For individuals who are likely to need the funds over the next couple of years, then cash is potentially a good option due to this higher short-term return. However, when considering investments over the longer-term, there are a number of factors that also need to be considered, such as:

  • Whilst the return from cash is currently attractive, this may not be the case at the end of a fixed term. At the end of the term, the prevailing cash returns on offer could be lower, whilst the market entry points may be higher. This of course isn’t guaranteed, but history shows cash over time rarely outperforms risk assets.
  • Although equity markets have performed better this year following the sharp losses in 2022, the estimated long-term returns assumptions have still generally improved this year.
  • Fixed income assets have seen a sharp improvement in their own long-term return assumptions following their severe losses, driven by the much higher yields now available.
  • By remaining in cash, this means potentially missing out on any growth in markets, as well as dividends/income payments.
  • Whilst cash offers a short-term good return, time in markets has historically proved that this has meant not missing out the strongest returns, which can follow periods of negative returns and can impact on overall long-term performance. Furthermore, Origen doesn’t recommend trying to time the markets as this can be impossible to call correctly.

For clients who have short-term needs for their money, cash would normally be considered due to the risk of market loss and no time to recover, however, for long-term investment objectives, remaining invested in markets is still believed to offer the best return potential. If the money were invested in a fixed-term deposit, there is no guarantee that there will be a comparable rate on offer in the future, whilst the timing of the re-entry into markets could be at higher levels than currently available. Furthermore, the portfolio would miss out on any growth in markets as well as income payments, which are substantially higher now for fixed income in particular.

CA10437 Exp:08/2024

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