Inflation – The Silent Killer

Inflation is a silent killer – it earns its’ reputation through the slow deterioration of the purchasing power of your money over time.  It is also the enemy of your savings because you always need to take it away from any growth to find out the real rate of return. Low inflation is easily overlooked from year to year, but the compounding effect soon catches up on you, leaving you with more money that is worthless in real terms. Some readers of this article will have memories stretching back to the 1970s and 1980s, where inflation peaked at 24.21% in 1975 and 17.97% in 1980.  Younger readers might not recognise this threat, but it is certainly on the rise again – but who knows for how long? Last week the Office for National Statistics (ONS) reported that inflation had climbed from 1.5 percent to 2.1 percent per annum.  However, the Bank of England Chief Economist has warned that inflation could top 5% by early 2022. To give you an idea of the corrosive effect of inflation, if your income stayed level from age 65 with inflation at 2.1%, then by the time you hit 79 you will be able to buy a quarter less with your money. The ONS inflation figure is based on a shopping basket of 720 goods and services that is updated regularly, taken from about 180,000 separate price quotations every month, collected in 140 locations across the UK, as well as from the internet and over the phone. Interestingly, the basket changes year by year. Additions to the baskets for 2021 include electric and hybrid cars, hand hygiene gel, men’s loungewear bottoms, and smartwatches, reflecting the changing spending patterns of the recent pandemic. This means that the indicated rate of inflation is not necessarily your rate of inflation, especially as you get older – so your personal rate of inflation may be significantly higher than this. Recent low-interest rates have also brought another problem for savers.  Whereas savers have always known that the rate they were achieving was below inflation, at least they had the comfort of being able to take a meaningful income from their savings to supplement their income. With Quantitative Easing giving institutions easy access to money from the Central Banks at bank base rate, currently 0.1% per annum, lenders have not had to offer competitive rates to savers. This has led to a large group of people losing a valuable income source and having to dip into their capital.  If inflation rises then, although you can expect interest rates to rise, this will merely help to erode the capital more quickly. This shows the importance of maintaining a balanced investment portfolio, not overly dependant on one investment type.  This will involve some investment risk in the short-term, but in the longer term is much more likely to give you a return that will keep up with the dreaded inflation. If you would like to review your investments to see how your returns could be optimised then please get in touch and one of our expert Wealth Strategists will be happy to run through everything with you.