Is inflation killing your savings?

Inflation is a term that has been quietly tucked away in the finance section of newspapers for many years, often overshadowed by more urgent headlines.

However, recent data suggests that this sleeping giant has awoken, posing a serious threat to the real value of your hard-earned cash and assets.

This blog explores the rising issue of inflation and how, without taking action, it might be hurting your savings.

The unfurling impact of inflation

Historically low inflation levels had led many to underestimate its impact on savings today, and the current economic environment compounds the risk.

According to the Bank of England, although inflation is expected to peak sometime this year, it’s unlikely to come back down to earth soon. Once inflation surges above 5%, history tells us that it takes, on average, a decade for it to fall back to the 2% mark.

Data from the Office for National Statistics (ONS) underscores the impact of rapid inflation on the cost of essential food items. For instance, cucumbers have shot up 52%, olive oil by 49%, and hard cheese by 44% in the year leading up to March 2023.

Overall, the annual inflation rate for food and non-alcoholic beverages was a staggering 19.2%, primarily driven by a 19.4% rise in the average price of bread and cereals.

A historical perspective on inflation

To truly understand the urgency of addressing inflation, it’s important to look back at how this economic indicator has behaved over the years.

While inflation has seen many peaks and troughs, economic volatility has become more extreme in recent years.

In the early 1980s, for example, the UK grappled with inflation rates as high as 10%. However, these were times of comparatively higher interest rates, often above 10%, which provided savers some reprieve. Additionally, wages generally grew at a rate that could keep up with rising prices.

Accelerate forward to the early 2000s and the decade that followed; inflation was mostly stable, fluctuating around 2 to 3%, with interest rates following a similar trend. This relative stability made it easier for people to plan, save, and invest.

Inflation today

Low interest rates

Interest rates have been historically low for years, hovering around 0.1% in 2020 and 2021. This environment leaves savers with little room to mitigate the eroding power of high inflation.

Your cash is essentially rotting away in traditional savings accounts.

Wage stagnation

Although some industries are seeing wage growth, it’s generally not keeping pace with the rising cost of living. This exacerbates the erosion of real income and savings.

Accelerating costs in essential commodities

As mentioned earlier, the ONS reported skyrocketing price hikes in essential commodities.

This pattern indicates that inflation affects areas that cannot be easily substituted or eliminated from a household budget, making the impact even more severe.

Global uncertainties

The post-pandemic landscape, geopolitical tensions, and supply chain issues contribute to inflationary pressures in a way that we haven’t seen in recent decades.

These factors compound the challenge of planning for future financial security.

The inflationary pressures today are coupled with low interest rates, wage stagnation, and global uncertainties, making it a perfect storm that puts your savings at serious risk.

Unlike in the past, where one or two factors could be navigated, we now face a multi-faceted problem that demands more sophisticated financial planning and investment strategies.

Solutions: how to combat inflation

Inflation acts like a relentless, invisible tax that constantly erodes the value of your savings. It has a long-term corrosive effect.

During times of low inflation, parking money in a savings account for five years or so didn’t seem too problematic. However, in the current climate, doing so could mean your money loses substantial purchasing power.

The question then is, what can you do to mitigate these risks?

Here are some recommendations:

Diversify into growth-oriented investments

A well-diversified portfolio with growth-oriented investments such as stocks or real estate can offer a hedge against inflation.

These asset classes have historically outperformed inflation over the long term.

Look at alternative investments

Alternative assets like commodities can offer some level of protection against inflation, although they come with their own risks.

Inflation-linked investments

High-interest inflation-linked bonds offer a means of earning a significantly higher return on savings than current or savings accounts.

Consult a financial adviser

If you’re grappling with the complexities of preserving and growing your wealth in an inflationary environment, it may be prudent to consult a financial adviser who can offer tailored, concept-driven investment advice.

Beating inflation today is more complex than it was, but it’s certainly still possible with well-orchestrated, diverse strategies that leverage the very best investment opportunities available.

Alternative investments and commodity exposure add another layer of protection against inflation’s corrosive effect.

Get in touch for tailored investment advice to guard your savings against inflation.

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