January 21st, 2022
Why rising inflation could put your clients’ wealth at risk
As you may know, the Bank of England (BoE) aims to keep inflation at around 2%, as a gentle rise in the cost of living helps to keep the wheels of the economy turning. However, while a small amount is typically a good thing, too much can pose a problem.
According to the Office for National Statistics (ONS), the Consumer Price Index (CPI) rose to 5.4% in the year to December 2021. This is the highest it has been since 1992 and many people are understandably concerned.
If you have clients who keep a large portion of their wealth in cash, they could be severely affected if this trend continues. Read on to find out why your clients need to be aware about how it could affect them and why working with a financial planner can help.
Increasing food and fuel prices are two of the biggest causes of the rise in inflation
To work out the rate of inflation, the ONS compares the cost of a basket of goods and services over time. This includes things like food, clothing, and transport expenses.
According to the Independent, the ONS claims that two of the main drivers of inflation are rising energy prices and the increasing cost of food. This is obviously a problem, as both are necessities so it can be difficult for people to reduce their household bills by simply cutting back.
Due to these increases, the cost of living has risen for many people. This can pose an obvious problem, as the same amount of money now buys less goods and services.
To see how much of an impact this can have over time, the BoE’s inflation calculator can be a useful tool.
For example, if your client wanted to buy £10,000 worth of goods and services in 1990, it would have cost £10,000. However, to buy the same in 2020 would cost them £23,244, due to an average annual rate of inflation of 2.9% over that period.
Of course, the rising costs of living are not necessarily an issue if your client’s income rises in line with inflation. However, it can still prove to be a problem if they hold a large portion of their wealth in cash.
Low interest rates mean that cash savings don’t grow by very much
The problem of high inflation is made worse by interest rates being currently very low. This means that any interest that your clients may earn probably won’t be enough to keep pace with rising prices.
At the start of the pandemic, the BoE slashed the base rate down to a historic low of only 0.1%. This was to encourage people and businesses to borrow more, which would hopefully stimulate more economic activity.
While they raised it to 0.25% in December, this is still well below the rate of inflation, meaning that your clients are effectively losing money by holding it in cash.
While many experts recommend keeping a portion of one’s wealth in cash to act as an emergency fund, holding too much can be harmful to your clients’ financial wellbeing. Instead, they may want to consider investing that money.
Investing their wealth can help your client resist the impact of inflation
One of the main benefits of your clients investing their wealth is that there is a much greater potential for growth than if they just held it in cash. Typically, the greater the risk that your client is willing to expose their money to, the higher the returns may be.
One thing to bear in mind is that all investments carry some risk and, as such, the capital is not guaranteed.
That being said, your client can reduce the chance of losing money by working with a planner to build a properly diversified portfolio. Holding a variety of assets from different economic sectors and geographical areas can help to make your clients’ wealth more resilient to the risk of economic shocks.
One of the main benefits of seeking professional advice is that your clients will be able to make an informed decision. This can help them to grow their wealth in the most effective way, giving them more confidence that they can reach their goals.
For example, a planner can help your clients to build a portfolio that reflects their needs and long-term plans. This can help to ensure that they’re not exposing their wealth to more risk than they need to, which can give them greater peace of mind.
Get in touch
If you have any clients who may be affected by rising inflation and may need to reassess their financial strategy, we can help. Email firstname.lastname@example.org or call 01562 829 222.
The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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.