Inflation and Your Savings
Put simply, inflation is the rate at which the average price of a basket of selected goods and services in an economy increases over a period. Usually expressed as a percentage, inflation means a decrease in the purchasing power of the relevant national currency. For example, if inflation is running at an annual rate of, say, 1.5%, goods that currently cost £100 will cost you £101.50 in a year’s time. Consequently, the buying power of £100 is reduced, demonstrating the need to increase its value.
In the UK, inflation is measured in two ways. The most used measurement is the Consumer Prices Index (CPI). The latest CPI figure for the UK released by the Office for National Statistics in January 2020 shows an annual rate of 1.8%. Whilst very low, there is no certainty it will remain at that level, so there is a very real need to look at ways of increasing the value of your savings in order to keep pace and indeed, outpace the prevailing inflation rate.
This can be achieved by investing your money wisely. There are several issues to consider before arriving at a suitable solution. Firstly, the risk to your capital that you are prepared to accept (an indeed, have the capacity to accept!) and the amount of time that you are willing and able to leave your money invested. A very low risk option would simply be a Bank or Building Society deposit account. However, interest rates are very low and are unlikely to keep up with inflation let alone outpace it. Inflation linked Bonds issued by some Governments could be another option as the return you receive will be linked to the prevailing rate of inflation in the relevant Country. For those with the ability and willingness to take some risk to capital with their money, may consider equity income funds which are capable of producing an “inflation plus” return.
As for time, the longer the chosen alternative can be held, the better. The rate of inflation will change over time so there will be a need to keep your options under review in order to achieve the best results.
As usual there is no “one size fits all” so feel free to contact us to discuss how a personally tailored investment portfolio can be constructed to meet your financial aspirations.