The cost of living is rising: is inflation eroding your savings?

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June 24, 2021 - Steve Collier

The cost of living is rising: is inflation eroding your savings?

If you have booked a holiday in the UK this year, eaten in a restaurant or bought new clothes, you may have noticed that the price of goods and services is rising rapidly.

The Office for National Statistics’ most recent report measuring consumer price inflation showed that the annual rate of inflation rose by 2.1% in the 12 months to May 2021, up from 1.6% to April. Inflation rates at this time are influenced by the effects of the first coronavirus (COVID-19) lockdown in spring 2020, but many economists are warning that rising inflation has further to run.

To fully understand the new figures, it’s important to remember that we have just passed the first anniversary of the Covid pandemic. The statistical effects of that landmark need to unravel before the real path of inflation and other economic statistics becomes clear.

When looking at the monthly statistics for the Consumer Price Index, typically we don’t focus too much on the short-term changes – which are often volatile – but rather on the longer-term trends, such as the 12-month growth rate. Whilst that usually works quite well as a rough rule of thumb, there can be exceptions and a global pandemic is one of them.

Just over a year ago we saw some dramatic short-term movements in many of our headline economic statistics. In April 2020 retail sales were down 18.1% and goods exports fell by 20.6%. The monthly Gross Domestic Product (GDP), which is a broad measure of overall domestic production and an indicator of a country’s economic health, dropped by a record 18.7%.

These were unprecedented times and the short-term movements were very much the focus of everyone’s attention. As the UK economy starts to recover, those dramatic declines from a year ago will leave their echo in the latest numbers.

What happens next?

We are likely to see headlines with double digit 12-month percentage growth reported in coming months. This won’t be because the UK is suddenly economically booming, but because the comparison will be with an historically low base period from a year ago. These figures could be misleading as they will provide a distorted annual growth rates as an indicator of the health of the UK economy.

What savers should be prepared for is the very real growing problem of inflation, and the rise in the cost of living. According to Moneyfacts, there are no savings account currently available that offer an interest rate that beats inflation. This means that money held in cash savings accounts is eroding, and interest paid on these accounts is not enough to curtail the problem.

What are the alternatives?

There is nothing like the fear of a pandemic for people who want to hold cash. Good financial planning has always been based on holding at least three months salary in accessible savings, so to warn against the dangers of low interest rates can sound counterintuitive.

Like so many aspects of life, the best course for stability is about having balance. If you are holding large amounts of cash savings then it is worth considering the alternatives. This means considering a blend of investments in a portfolio which meets your attitude towards taking risk and your long term goals. For many people, this goal can be as simple as preservation of capital, taking a low risk approach to investing, but with a growth target of at least keeping up with inflation.

We are here to help.

We have a team of highly qualified and skilled independent financial advisers who can help you to review your savings and investments. Whether you are a first time investor or you need help reviewing a wider financial portfolio, our experts can guide you through the process. To find out more call 0116 269 6311 or email may2021

Past performance is not a reliable indicator of future performance.

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.