Keeping up with inflation: What can you do if your savings are not keeping up with the rising cost of living?

Inflation is a subject that has been hard to avoid in recent months, whether it has been on the news or at the supermarket checkout. Everyone is feeling the effects of the rising cost of living.

The UK introduced ‘inflation targeting’ in 1992 after exiting the European Exchange Rate Mechanism. At the same time, the Bank of England was given responsibility for setting interest rates with a target rate of 2.5%; this was then reduced to 2.0%. Overall, this has been a successful initiative, with the price of goods and services rising annually since 1992.

That is until now. Inflation takes several forms: paying the same price for less product or paying a higher price for the same (or potentially inferior) product. Whichever form it takes, it all boils down to the same thing: money not going as far as it used to.

Until recently, this has not been a major issue for UK consumers and investors. Those who have left cash in current or savings accounts have not seen it lose real value dramatically over time. Now the situation is more difficult.

Interest rates have now risen. For example, a depositor might achieve close to 4.5% interest if willing to leave their cash untouched for a year. When compared with inflation of around 10%, this ends in a loss of spending power for the money concerned. This loss builds rapidly over time, leaving cash savers out of pocket.

So how can we combat these factors?

The simplest way is to bring forward spending decisions where price rises are anticipated. This is a solution in some, but not all circumstances. Another is to invest cash deposits in assets that have the capacity to counter the negative impact of inflation. These include assets such as stocks and shares, commercial property and commodities such as gold and other precious metals. However, please bear in mind that your capital is at risk and you may get back less than the original amount invested.

All households need to find 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. The price rising environment that we see today should bring this debate up the agenda for anyone concerned about the ‘real’ long-term value of their 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