Inflation and what it could mean to you

Inflation may be ready to make a comeback.

Around three years ago, it was running at 3.1% and outpacing returns on cash investments, ensuring that saving simply meant watching the value of your money shrink. The government made a small increase in interest rates, inflation fell and all seemed to be well.

But in the wake of Covid, inflation may be stirring. At Continuum we are looking at what is going on, and what, if anything, you could do about it.

What is inflation?

Inflation is the familiar phenomenon of rising prices. It is something that we are accustomed to in the UK.

The loaf that cost 25p forty years ago costs more like £1.25 now. House prices have seen even more dramatic inflation and look to be continuing to head skyward – but our inflation is in single figures and manageable.

The main causes of inflation are either excess demand or rising external costs. Covid and lockdown reduced economic activity all round, effectively reducing both.

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However, with the recovery looking as though it is ready to accelerate and the world going back to work, demand for everything from raw materials to luxury goods is increasing. Shortages mean rising costs. Both inflation triggers could be in action.

Is inflation inevitable?

Governments are often able to get inflation under control. Putting the brakes on the economy is done by increasing interest rates, reducing the amount of money people have to spare, and so cutting demand.

However, with the country attempting to pull itself out of the deepest recession in living memory, there may be little scope for doing anything but encourage economic activity with interest rates so low, borrowing money can look almost free. If inflation is the result, we may simply have to regard it as the price of getting the country back on its feet.

In fact, although it has never been explicitly stated, the government may actually be planning on allowing some measure of inflation. Chancellor Rishi Sunak’s budget promised no increases in tax – despite huge shortfalls thanks to the lockdown, and the equally daunting costs of furlough. Instead, many allowances were frozen. This might be seen to make sense if inflation occurs, providing extra income for the exchequer as costs and wages rise, while delivering on the promise of not adding a penny to tax rates.

High inflation would also benefit the government in another way, by eating away at the value of the deficit built up in the wake of Covid.

What would inflation mean for your finances?

So the government may be prepared to tolerate some inflation, and use it judiciously to keep the recovery on track while paying down debt. But what would it mean to you?

The answer will depend on your individual circumstances. It can benefit borrowers. For example, anyone with a mortgage, and especially a fixed-rate mortgage benefits from inflation, as it effectively reduces their debt. Businesses may find it easier to pay back historic loans if the value of money falls.

However, for savers and especially those planning for retirement, inflation will cut how far their money will go in the future. Low returns on savings accounts and a cut in the buying power of pension pots and annuities can mean serious problems.

What can you do?

Inflation may be coming, but it may be possible to prepare for it. If you put your money into investments, rather than keeping it as cash savings, you may be able to avoid its value being whittled away.

Whether you are worried about inflation or simply want to make the most of your money, investment could be the answer. See how we can help you become an investor.

Starting investing can seem a big step, but with help from the Continuum team, investing – in a tax-free vehicle such as a Stock and Shares ISA – can be as easy as saving. You don’t need to be a financial expert. We can help you select funds where your money will be invested by expert managers with the aim of providing the growth or the income you need.

To find out more, simply contact us today.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

Equity investments do not afford the same capital security as deposit accounts.

Your home may be repossessed if you do not keep up repayments on your mortgage.

The Financial Conduct Authority does not regulate taxation advice.

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