1 in 5 savers aren’t beating inflation. Are you?
You might have seen in the news that inflation has fallen recently – but it could still erode your savings. Read all you need to know about this issue here
Since the Covid-19 pandemic swept the world in 2020, you have likely seen the word “inflation” reported very often in the media.
Inflation describes the measurement of average costs around the UK, based on a “basket” of around 750 goods and services. It gives consumers, banks, and investors an idea of how much prices have risen by in the last 12 months, and the latest rate is normally announced monthly by the Office for National Statistics (ONS).
One important aspect to inflation that many fail to consider, is that if you hold cash savings as part of your wealth portfolio, the value of these funds could be eroded over time by rising prices. In fact, research published by MoneyAge found that 1 in 5 savers aren’t beating inflation – meaning their cash is not growing in line with the cost of goods and services in the UK.
Keep reading to discover why this might be the case, and how you can ensure your savings grow in line with inflation where possible.
Inflation rose to a 40-year high during the pandemic
When Covid-19 arrived, world economies stagnated, with several sectors almost completely grinding to a halt and millions losing their jobs for the foreseeable future.
To help provide a financial buffer, the government introduced “quantitative easing”, a process of manually inflating the economy by offering support to businesses and individuals who were struggling. This included the reliefs and bursaries offered to self-employed people, and the furlough scheme for employees.
This measure, combined with supply chain issues from overseas imports, and the Russian invasion of Ukraine in February 2022, inflation rose to a peak of 11.1% in October 2022, the ONS reports. This meant that prices rose by 11.2% in just 12 months.
As of October 2024, inflation has fallen back to a more manageable rate, reaching a low of 1.7% in September before rising again to 2.3% in October. But crucially, prices are still rising – these increases are on top of the exponential upticks we experienced during the pandemic.
The Bank of England has a target inflation rate of 2%, and implements interest rate changes according to this target
In an effort to control the rate of inflation during the pandemic, the Bank of England (BoE) raised its base interest rate from 0.1% to 5.25% between December 2021 and August 2023, through a series of 14 incremental hikes.
The aim of doing this is to raise consumers’ outgoings, reducing the amount they spend on goods and services. As an example, this increase sent the cost of borrowing up, having an impact on mortgage repayments along with other forms of debt.
The BoE sets its target inflation rate at 2%, deeming this a healthy long-term rate of increase for the cost of living in the UK. So, with inflation falling to around this target in the autumn of 2024, the BoE cut the base rate twice, bringing it from 5.25% to 4.75%.
Some savings accounts offer interest rates that are lower than the rate of inflation
You might be thinking: “What does this have to do with my savings?”
When the BoE’s Monetary Policy Committee (MPC) makes base rate decisions, lenders, banks, and building societies usually follow suit. As such, you might have experienced a healthy uptick in the rate of interest your savings received during the pandemic.
Despite this, according to the MoneyAge report, 17% of savers have an interest rate on their savings that falls below the rate of inflation – less than 2.2%.
What’s more, in January 2024, Yorkshire Building Society revealed that a staggering £400 billion lies in UK savings accounts receiving less than 1% in interest. The report says that Brits could be losing up to £1,000 a year in real terms due to the eroding effects of inflation on cash wealth.
Financial planning could inflation-proof your wealth
The reality of falling spending power could be daunting to face.
The BoE’s inflation calculator reveals that a product or service that cost you £5,000 in 2019 would have cost £6,261.19 in October 2024, on average. By comparison, if you had left your £5,000 in a savings account paying 1% interest in 2019, your savings would only have grown to £5,250.16 over five years.
What’s more, inflation could have an effect on the value of your investments too – in times of high inflation, company profit margins can fall, affecting share prices.
If you’re concerned about your wealth losing its spending power over the years, we’re here to help.
Using cashflow modelling software, your Kellands financial planner can factor inflation into your long-term financial plan, taking steps to reduce its impact where possible. This way, you’re aware of how inflation could affect your spending power and can gain peace of mind, knowing you’re doing what you can to combat it.
Get in touch
To find out more about how financial planning could aid in inflation-proofing your finances, email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate cashflow planning.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.