May 20th, 2022

5 important ways inflation can affect your wealth

The UK’s cost of living crisis has pushed inflation to a 40-year high, with its rate standing at 9% in May 2022.

The rate of inflation is measured and released by the Consumer Price Index (CPI). The price of 700 goods and services around the UK are measured periodically, so the rate of inflation is calculated as a reflection of the overall price of items.

You might be wondering: why has inflation risen in the last 12 months? Most recently, Ofgem’s energy price cap increase of 54% has meant household bills have increased dramatically for many people. What’s more, the Russian invasion of Ukraine has contributed to spiralling fuel and energy prices throughout the west.

Plus, as the economy begins to return to normal after the Covid-19 pandemic, public spending has increased. As spending increases, prices often follow suit.

In addition, supply chain issues, caused by both the pandemic and the Ukraine war, can lead to inflation; if demand remains high, but supply is low, this leads to greater competitivity and rising prices.

In small doses, inflation can be a good thing for the economy. This is because the public might be encouraged to spend money now, in anticipation of prices continuing to rise. However, high inflation, like the rates we are currently experiencing, can have the opposite effect.

If you are concerned about inflation, here are five areas of your wealth that might be affected, and how we can help.

1. Inflation can make borrowing more expensive

When inflation begins to rise, the Bank of England (BoE) usually responds by raising the base rate of interest. As of May 2022, the base rate stands at 1%.

During the pandemic, the base rate was reduced to a historic low of 0.1%. Now, the BoE is steadily increasing it again, in order to dampen spending power and slow the rate of inflation.

So, when there’s high inflation, you could also experience higher interest rates as a result. This means, if you are applying for a mortgage or another loan, you need to consider how inflation could make borrowing more expensive.

If you are applying for a mortgage in the midst of rising interest rates, it may be constructive to consult your financial planner for guidance.

2. Inflation is likely to weaken your cash savings

In April 2022, Legal & General published research revealing that 52% of savers didn’t realise how inflation might affect their wealth, while 13% thought inflation would leave them better off.

In fact, while your cash savings may earn interest, it is unlikely that this interest will outflank the rate of inflation we are experiencing in 2022.

Indeed, according to Moneyfacts, as of 18 May 2022, the highest rate of interest on an easy access savings account is just 1.1%. So, while the rate of inflation remains at 9%, the real value of your cash savings will be weakened by inflation.

An alternative to cash savings is to invest your money, for example in a Stocks and Shares ISA. It is important to understand the benefits and risks of investing, so it may be helpful to discuss this option with your financial planner.

3. Your pension value may decrease in an era of high inflation

If you are approaching retirement, or are already retired, you could be concerned about how a high rate of inflation might impede your pension fund.

Indeed, FTAdviser reports that two-thirds of 2021’s retirees are at risk of depleting their pension pot too quickly. As prices continue to increase, your later-life income might not go as far as you had hoped and you may have to draw more from your pension fund than you expected.

There are a few options to consider if you are concerned about the spending power of your pension. You could consider returning to work part time, taking up what is referred to as “flexi-retirement” and earning a supplementary income. Alternatively, you could consider downsizing your home, or making another lifestyle change to accommodate high inflation.

No matter your retirement circumstances, it could be constructive to seek professional guidance when drawing your pension in an era of high inflation.

4. Inflation could impede your disposable income

“Disposable income” is used to define spending on non-essential items, such as holidays, eating out, cultural activities, and sports.

Of course, inflation is measured by the prices of everyday goods and services. As prices increase, your disposable income may lose spending power, resulting in fewer opportunities for leisure, travel, or cultural events.

Indeed, disposable income is forecast to drop to its lowest since records began, according to Office for Budget Responsibility (OBR) statistics published in March 2022. So, it may be wise to factor in the impact of inflation when planning holidays, trips, meals out, and arts activities this summer.

5. Inflation can increase financial stress

As you read more about how inflation could have a negative impact on your wealth, it could be easy to become overwhelmed.

Indeed, financial stress is something 1 in 4 Brits experience daily, according to a Perkbox study. Financial stress could lead to:

  • Loss of sleep
  • Anxiety or feelings of panic
  • Pressure to perform well at work
  • Increased stress placed on personal relationships, such as your marriage.

Your financial planner can help you shoulder the pressures of high inflation, giving you valuable peace of mind as you navigate this tricky time. We can help you utilise key tax allowances, form a financial strategy, and make the most of your later-life income while spending power is impeded.

Get in touch

For professional, accessible guidance you can rely on, email or click here to request a callback from one of our advisers.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

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