In this article, we are sharing a video we published recently concerning the rise of inflation and the potential impact it may have on people in the UK. This short informative video is delivered by one of our independent financial advisers George Rashbrook and is part of our ongoing commitment to helping people improve their financial literacy and knowledge.
Concerned about the impact of inflation? Speak to one of our IFAs today
After watching this video, if you are concerned about the impact inflation may have on your financial plans, get in touch with one of our independent financial advisers today.
You can call us today on 01329 550 190 to see how our independent financial advisers can help.
Inflation in the news. What does it mean?
Inflation has been headline news this week. The consumer price index has hit 5.1% and people are very concerned.
What is inflation?
Inflation is the reduction of purchasing power of a currency over time. When inflation occurs, the cost of goods and services increases. The money in your bank is worth less than it was before. Every pound you have buys you less.
What does all this mean and should you care?
In simple terms, based on the current rate of inflation it means something that cost £100 year ago will cost £105.10p today.
An extra £5.10p may not sound a lot, but when you apply that to everything you spend – food, petrol, clothes, gas and electric, everything you can think of – it adds up to a big increase.
Related reading: What is inflation, what causes it, and how is it measured?
The long-term effect of inflation
More concerning than that is the long term effect of inflation.
For example, if inflation were to continue at the current rate for the next ten years, that thing that cost you £100 a year ago would cost you £173.83.
That is a massive increase.
The extra £5.10p becomes £73.83p.
Inflation impacts savers
This is particularly going to hit people with savings in the bank or building society.
If you think keeping your money on deposit is “safe” you might need to revisit this.
For example, if you have £10,000 in the bank and inflation continues at today’s rates, you have ten years to grow it to £17,400 just for it to be worth the same as it is now.
Simply put, in ten years you would need an extra £7,400 to purchase exactly the same items as you did today.
Please note, when we say “safe” we are referring to how safe your money is in terms of the impact inflation can have on its value. Money deposited in saving accounts, up to the value of £85,000 is covered by the FSCS.
Does raising interest rates help limit inflation?
The Bank of England has taken the steps to raise interest rates.
That’s good for savers, right?
Well yes, but it’s nowhere near enough to eliminate inflationary risk.
The amount of interest you earn on your savings has to be at least equal to the rate of inflation for a savings account to be a viable long-term strategy.
If inflation is 5.1%, you need to earn 5.1% interest on your savings for your money to keep pace with the rate of inflation.
The base rate has increased from 0.1% to 0.25%. For a basic-rate taxpayer to match inflation at today’s rates it would need to be closer to 6.8%.
It’s like you’re saying to the bank manager “look, I need 680 of something” and the bank manager saying, “The best I can offer is 25”.
Don’t get me wrong, a savings account is the right place for some of your money – an emergency fund, next year’s holiday, anything you know you’re going to spend in the short term.
But as a long-term strategy in an environment of high inflation, it’s a risky strategy that offers very little by way of reward.
Concerned by inflation?
If this is of concern you need to seek independent financial advice, put yourself in an informed position and plan ahead.
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You can find links to two related articles we have recently published below.
Please note: all information contained in this video was right, and correct at the time of publishing and has been sourced from reputable mainstream sources.