Tackling inflation – taking a bite out of your finances

Kerry Thomson

Origen Consultant

Inflation figures have recently been hitting the headlines, having reached 2.9% this month, its joint record highest level in the last five years.

Why does inflation matter?

Inflation has the effect of reducing the purchasing power of your money in the future. So you would buy less for £100 in the future than you can today, because of the effect of inflation.

After 5 Years
After 10 Years
After 15 Years
After 20 Years
2.5% Inflation

Alternatively £100 would need to be worth £128 in 10 years time to have the same purchasing power.

If you are still working, pay rises can help to tackle inflation, so you can maintain or improve your standard of living – but as we have seen recent pay rises, particularly in the public sector, have fallen below the rate of inflation, which effectively means that people are worse off.options. 

BBC - Pay and prices since May 2016

If you are in retirement, you need to ensure that your retirement income is providing the growth to protect your future income levels from the impact of inflation.

For your investments, to maintain their future purchasing power, the growth needs to be sufficient to meet the impact of inflation and any tax, fees or charges which you may have to pay on the investment and any income you take from your investments.

What does the inflation figure mean?

Each month, Consumer Price Inflation (CPI) is announced which shows the rate at which the prices of goods and services bought by households rise or fall. It is important to note that if inflation falls, this means that prices are still rising but at a slower rate. Only when inflation is negative are prices falling.

The CPI latest figure of 2.9% reflects the typical expenditure of a household, but your own inflation rate may be higher or lower depending upon the things you spend your money on. For example, from the latest figures coffee, petrol and clothing were all showing inflation of 5.1%, so if these items take up more of your expenditure than average you may face a higher personal rate of inflation.  

What does it mean for my savings?     

Banks and building societies offer average rates of 0.14% on instant access cash savings accounts which will give a fall in value of 2.76% a year, based on the current CPI of 2.9%. M&G have calculated that on a balance of £5,000 this will result in a loss of £138.

What is the outlook for inflation?

The Bank of England has a target inflation rate set at 2%. They expect the rate of inflation to further increase from the latest figure of 2.9% later this year, but expect it to ease early in 2018. However the latest inflation figures do add more ammunition to those calling for a rise in interest rates which is now anticipated early next year, but is subject to a monthly review at the Monetary Policy Committee meetings.

Ask your Origen consultant to see if your savings and cash are keeping pace with the effects of inflation. By taking the action required, your investments can provide the income you need now and in the future and maintain or improve your future purchasing power. 

This article is for information only and is not to be taken as Financial Advice – CA1581 Exp 09/18

Related News & Insights

This will close in 0 seconds

We use cookies on this website, you can read about them here. To use the website as intended please…

We use cookies on this website, you can read about them here. To use the website as intended please…