Feeling the impact of a rising cost of living: What to do if your savings are not keeping up with inflation

But how much do you really know about inflation? And how does inflation affect our savings – that all-important cash we’ve set aside for a rainy day.

The simple answer is that as the price of goods and services goes up, the value of that cash goes down and you can either spend it now or look at other ways to invest it which could protect its value.

Here the experts at Close Brothers Asset Management, break that down into bitesize chunks to explain how it all works.

Targeting inflation

Thirty years ago ‘inflation targeting’ was introduced in the UK after the country came out of the European Exchange Rate Mechanism.

At that time responsibility for setting interest rates was given to the Bank of England, with a target rate of 2.5 per cent, which was later reduced to 2.0 per cent.

Close Brothers Asset Management say that overall, this has been successful, with the price of goods and services rising annually by around those targets since 1992. That is until now.

This is referred to as ‘high’ inflation or even ‘runaway’ inflation. But what does it mean exactly and how do you measure it?

What is inflation?

Inflation takes several forms: paying the same for less of something or buying the same amount of a product but paying a higher price, or getting an inferior product.

Whichever way you look at it, it adds up to the same thing - the money in your wallet, pay packet, or bank account, is buying you less than it used to.

This hasn’t been a huge issue for either consumers or investors in the UK until recently. If you have cash in current or savings accounts have not seen it lose real value dramatically over time. But now the situation is more tricky.

Interest rates have gone up and that has an impact on your savings, ie on what that same money will buy for you. A depositor might be offered close to 4.5 per cent interest if willing to leave their cash untouched for a year – but if you compare to that with inflation of around 10 per cent, the end result is less spending power for the money concerned . Put simply this means it won’t buy you as much as it used to and this loss can build up rapidly, leaving cash savers out of pocket.

How can you minimise the damage?

The easiest way is to bring forward spending decisions where price rises are anticipated – in other words, buy it now before it goes up in price. That’s fine if you’ve been saving for something specific, like a car or a house, or home improvements. But it might not be a solution for everyone.

Investing cash deposits in assets that are able to counter the negative impact of inflation is another option. Assets like this include stocks and shares, commercial property and commodities such as gold and other precious metals.

So you hold these assets rather than actual cash. However, you must bear in mind that your capital is at risk and you may get back less than the original amount invested.

It’s important that everyone finds a balance between keeping cash set aside for a rainy day, and wishing to preserve the real value of their assets in these difficult times. And with more price rises and squeezes on our money forecast, now is a very good time to start talking about the options and understanding whether or not you should be concerned about the real long-term value of your savings and assets.

If you would like to know more then please get in touch with one of experts at our Chichester office:

Email: [email protected]

Telephone: 0203 995 5925