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How does inflation affect savings? Protect your wealth with these tips

A perfect storm of post-lockdown recovery, supply-chain issues and soaring energy and fuel prices have pushed up the cost of goods and services across the world. In the UK, inflation has jumped to its highest rate in a decade. In Spain, it’s surged to a 29-year high and in the US it’s at 5.4%. A

How does inflation affect savings

A perfect storm of post-lockdown recovery, supply-chain issues and soaring energy and fuel prices have pushed up the cost of goods and services across the world. In the UK, inflation has jumped to its highest rate in a decade. In Spain, it’s surged to a 29-year high and in the US it’s at 5.4%. A high inflation rate means consumers’ money won’t go as far as it did before.

We might shrug when we see that a chocolate bar has increased in price, but when we see it reflected in the cost of a pint, a cinema ticket, a tank of petrol and a holiday, it can be frustrating.

Some economists argue that a little inflation can be good for the economy because it encourages people to spend.

When people know that prices are going up, they’ll be more inclined to buy sooner rather than later. Unsurprisingly, inflation isn’t something people tend to welcome with open arms.

A cinema ticket was just 30p in 1970 but now it can cost as much as £13. It affects salaries too. In Pride and Prejudice, Mr Darcy was considered one of the richest men in Britain. He earned £10,000, which in today’s money isn’t even high enough to reach the Personal Allowance.

An increase in income sounds like a good thing, but many salaries fail to keep up with inflation. When salaries do increase, this can lead to further inflation anyway. Employers might increase the cost of their goods and services to meet the growing demands of doing business. It’s a vicious cycle!

History tells us there’s little we can do as individuals to curb inflation, but there are ways we can mitigate the impact it has on our finances. Read on to find out how inflation affects our savings and what we can do to protect our wealth.

What causes inflation?


Governments pour a lot of resources into tracking inflation and trying to keep it low, but in many ways it’s inevitable. It’s difficult to control because there are so many factors that can cause it, including:

● Cost of materials
● Cost of labour
● Productivity
● Tax
● Exchange rates
● Economic recovery
● Falling interest rates
● The government printing more money

Part of the problem with inflation is that it doesn’t affect everything at once. If the cost of everything went up at 100% a year and so did everyone’s income, it wouldn’t actually do any harm. It would be a little pointless, though.

The impact inflation has on your own finances will depend on your personal circumstances, job and what you consume. For example, when the price of petrol goes up, you’d be forgiven for thinking cyclists won’t be affected.

But while they won’t be paying for petrol themselves, the goods and services they use might change as businesses try to make up for a rise in costs.

How does inflation affect savings?

Inflation is bad for savers because when you combine rising inflation with low-interest rates, it’s difficult to get a good return on your money. The money you’re working hard to pour into your savings now won’t be as valuable in 10, 20 or 30 years. It can feel as though you may as well spend it!

Inflation can also impact borrowers. Loan rates are often higher and interest-free periods are shorter. Accessibility criteria for mortgages can also be tightened, making it harder for people to buy a house.

How to protect your savings from inflation

We’re living longer than ever before, meaning it’s more important than ever to try and mitigate the impact that inflation has on our savings.  If you’re 60 years old now, you have a one in four chance of living into your 90s. A lucky 5% of women will reach 100. Unless we find ways to grow our savings, their value will soon be eroded in our old age. Here are a few ways to protect your savings from inflation.

Savings are essential

As tempting as it may be to pour all your money into stocks, property and other investments, having cash set aside is crucial.  You’ll need it for short-term goals such as home renovations, weddings, holidays and perhaps even your children’s house deposits.  Then we have emergencies. If the pandemic hasn’t highlighted the importance of a strong emergency fund, nothing will.

Invest in assets with inflation-beating potential

Once you’ve got your emergency fund and short-term savings sorted, you can invest what’s left. This is the money you’ll use to build wealth and hopefully beat inflation. Of course, any investment carries an element of risk and there are no guarantees that your money will grow.

But one thing is certain – inflation will continue to eat away at money sitting in the bank. Although the stock market is risky, particularly for short-term investors, its historical performance is inspiring and enough to make non-investors wish they’d got onboard sooner.

It’s impressively resilient, even following periods of economic, social and political turmoil.

Over the last 20 years, for example, the US stock market has experienced three bull markets and three bear markets along with the terrorist attacks of 2001, the 2008 financial crisis and the pandemic. Despite these unprecedented events, the S&P 500 successfully generated a total annual return of 7.46% with dividends reinvested. A $10,000 investment made at the start of 2001 would now have grown to $42,230 by the close of 2020.

There are even individual investment strategies that can help to mitigate the impact of inflation. Inflation-index-linked bonds can help to hedge against inflation risk because they’re tied to the costs of consumer goods as measured by an inflation index, such as the consumer price index.

For example, the Vanguard Eurozone Inflation-Linked Bond Index Fund tracks the performance of the Bloomberg Global Inflation-Linked: Eurozone – Euro CPI Index. At a minimum, all bonds purchased by the fund will be rated ‘investment-grade’. ‘Investment-grade’ bonds are generally those with a relatively low risk of default.

You can see some performance history below:


Cashflow modelling

Financial advisers often have a number of tricks and tools at their disposal to calculate how much money is needed in the future and whether your current progress puts you on track to afford the life you want. Cashflow modelling software is particularly good at this and your adviser can use it to factor in everything from retirement income to second homes to your children’s university fees.

Inflation may be unavoidable and daunting, but that doesn’t mean we’re powerless. With the help of forward planning, financial advice and wise investments, we can build so much wealth for the future that the cost of petrol or a pint doesn’t faze us.

This communication is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity.