How is inflation affecting your savings and what can you do about it?

Inflation has been making news headlines more than ever recently, but what does this mean in reality for you and I? For those of us thinking about how best to invest in our future, inflation will ultimately play a big role in decision making. But what does the current inflation rate mean for your savings and what can you do to offset its impact?

What is inflation?

When we talk about inflation, we’re referring to the rate at which prices increase over a yearly period.

Inflation in the UK is calculated by the Office for National Statistics (ONS), using several indices. The most influential of these is the Consumer Prices Index (CPI), which tracks the cost of 700 “typical” goods and services - ranging from a loaf of bread to cinema tickets - to work out the average rise of prices in the past twelve months.

How does inflation affect you?

Whilst some may think they are protected from the impact of inflation as long as their savings are safe in the bank, with the current CPI rate at a 40-year high, this is not the case.

In real terms, if the inflation rate is measured at 9%, a product costing £1 in July 2021 will cost £1.09 in July 2022. This increase in the cost of living means you’ll find that your income doesn’t go as far as it did a year ago.

This means that those with long-term savings goals are particularly affected by rising inflation, as money held in savings accounts is effectively falling in value - at a rapid and unprecedented rate. The average interest rate on a UK savings account currently sits at a record low of 0.2%.[1] This fails to compete against rising inflation, currently at a record high, meaning the purchasing value of money you deposit in the bank will be reduced when it comes time to spend it.

How can you counter inflation?

To tackle the impact of inflation on your savings requires investment in tangible assets, able to generate returns which can compete with and exceed inflation rates.

Investors seeking a low risk and high reward venture frequently turn to the property market, stock market, or in recent times cryptocurrency. In the turmoil of the past two years, the UK property market alone of the three has proved itself to be unshakeably resilient. Despite the ongoing impacts of the pandemic and crisis in Ukraine on global financial markets, UK house prices rose on average 9.7% between March 2021 and March 2022. In fact, areas of notable growth such as the London Borough of Kensington and Chelsea saw increases of more than double this (a 20.3% rise between March 2021 and March 2022).[2]

New build developments are often considered an optimum investment, providing typical returns of 10-12% with minimal risk to your capital. Equally, permitted development conversions are reliable propositions for those seeking a quick return without complications. This means that property remains a safe investment for those looking for a financial venture in the current market.

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[1] https://www.statista.com/statistics/1118490/annual-average-bank-interest-rate-in-the-united-kingdom/

[2] https://www.gov.uk/government/statistics/uk-house-price-index-for-april-2022/uk-house-price-index-england-april-2022