Weekly Spotlight: Inflation on the rise

The Office of National Statistics (ONS) reported its latest inflation figures earlier this month, showing that prices are now rising by 0.7 per cent a year, up from 0.5 per cent.1

That might not sound like much, but if inflation was at just over this level (0.75 per cent), a bank account with £100,000 in it would be worth only £92,800 ten years later unless you were paid sufficient interest on the money you had tucked away.

The rise comes just as the government-backed National Savings & Investments (NS&I) cuts its rate on its formerly inflation-busting accounts. While Premium Bonds are now paying the equivalent of one per cent interest, you have no guarantee that you’ll get any return with this product. The rest are being drastically cut, with some paying at little as 0.01 per cent.

NS&I isn’t the only cash account provider available, of course, but most offer equally low rates. This means that, for those who are not willing to take a risk with their money, or to tie it up for a long time, it is becoming harder to ensure that cash in the bank will not lose money.

Everyone’s attitude to dealing with the inflation conundrum is different, but here are some things to consider if you are wondering what steps to take.

Everyone’s inflation rate is different

Prices might be rising by 0.7 per cent in general, but your own experience of price rises will differ depending on what you tend to spend your money on.

The Office for National Statistics (ONS) uses a basket of typical goods to calculate how fast prices are rising. It’s a basket that has differed over time, with vinyl records removed and coffee pods added in recent years, for example. The combined change in the price of these goods gives us an inflation rate, so if you spend more money on average on certain areas, you’ll find your inflation rate is skewed.

The most recent rise in inflation was caused by a rise in the price of clothes, second-hand cars and food, and offset by a fall in the cost of energy and holidays, for example; so not everything is rising at the same time.

Inflation does not have just one rate

The 0.7 per cent headline rate for inflation is known as CPI, or the Consumer Price Index, but the Government’s Office For National Statistics (ONS) also produces a CPIH, which includes the same basket of goods as the CPI, but also adds the cost of housing for those who own their own homes, and the RPI, which also incorporates some housing costs but uses a different method.

The Bank has a target for inflation to rise slightly

While prices don’t always rise, the Bank of England has a remit to keep inflation as steady as possible, and if it is on track then prices rise gradually. Because deflation (when prices fall) is also bad for the economy, as people defer spending (you can find the Bank’s own explanation for this here), it is seen as more desirable for prices to rise.

There may be higher inflation ahead

Monetary policy aimed at getting us through the coronavirus pandemic, such as Quantitative Easing, a form of printing money, can cause inflation, particularly in things like property - as the Bank itself concluded in 2012 when looking at the impact of earlier QE.

A no-deal Brexit could also cause UK inflation by raising the price of goods2, meaning your money could go less far.

Investment can help you to outpace inflation

While putting your money in the bank makes it hard to outrun price rises, investment is often a way of ensuring your money keeps track with inflation. Many shares pay dividends that can rise every year, while a company’s earnings should in theory rise with prices over time. It is also possible to buy inflation-linked bonds.

Investing is not without risk of course, but if you have money to tuck away for the longer term, it is something that you should consider, with the help of a specialist adviser. There’s more here about how to inflation-proof your portfolio: https://www.afhwm.co.uk/news/story/inflation-proofing-your-portfolio.

This article is for information purposes only and is not intended to recommend suitable investment strategies. You should seek professional financial advice before taking any action. Please note the value of investments and the income derived from them may go down as well as up.

  1. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23

  2. https://www.bbc.co.uk/news/business-54678802