What Does Inflation Mean for Savings?
Inflation, we hear it a lot in the news, but what does it actually mean for our money and savings?
Earlier this year, the Bank of England announced its interest rates are on hold at 0.1%, predicting inflation would increase to 4% later this year; as a result of the UK’s Covid recovery. This is the highest rate for the last 10 years. 1
To save and invest your money, understanding inflation is crucial for your financial planning as it can take a large chunk out of your purchasing power with your money.
What is Inflation?
Inflation is the percentage of how much the prices for goods and services have changed over time. It’s calculated by comparing the cost of certain goods and services today with how much they cost last year. The difference between these is the rate of inflation, which can increase or decrease.
For example, if there is an inflation rate of 4%, it means that prices are 4% higher than last year on average. So, something that cost £100 last year, costs £104 today.
As you can see, over the years and decades these differences can quickly add up.
The Office for National Statistics produces three measurements of inflation every month. Checking prices on common consumer goods and services, as well as costs of living.
A rising inflation rate means it is becoming more expensive to maintain your lifestyle. In addition, if your income has not increased, this causes your buying power to fall as your money has to work harder to buy the same goods and services.
Most importantly, the inflation rate doesn’t just affect our everyday costs of living, it also can have an impact on investments, savings and pensions.
How is Inflation Controlled
As you can imagine, if not kept under control, inflation can have a negative impact on the economy. The Bank of England uses the current inflation rate to set their base for the interest rate to manage inflation. This, in turn, influences the amount of interest you will get on your savings and how much you’ll be charged in interest for borrowing money.
So, if the interest rate is low, it could result in fewer earnings from interest on your savings.
This is important because if you saved £100 today, a year later (with inflation rising) that amount would not get you the same as it did the year before. So, it’s important to consider the interest rate vs the inflation rate to ensure your savings make a profit in real terms.
So, if you’re looking to grow your money, you need to ensure the interest rate on your savings product is higher than the inflation rate.
However, you may or may not want a product that’s higher than inflation depending on your circumstances and savings goals. As typically you may need to take more risk to receive higher returns. It’s important to know what is right for you to keep your money safe and align with your financial plans.
Furthermore, for those saving for retirement, the increasing rate of inflation could be chipping away at the buyer power of your pension pot when you come to use it. It’s important to monitor the performance of your funds to ensure that they’re growing in real terms.
So, simply put, if you forget to factor in the rate of inflation over time when deciding where to save your money, you could find your pot shrinks over time.
Finding The Right Savings Products For You With Schofield
When it comes to savings and financial goals, Schofield can help find the right products based on your needs and circumstances. Get in touch with our independent and chartered financial planners based in Harrogate today!
The value of an investment with Schofield Money Ltd is directly tied to funds selected, as a result, the value can fall as well as rise, you may get back less than originally invested.
This article is for information purposes only. It does not constitute any financial or investment advice. Please contact us if you wish to proceed with any course of action suggested in this article.