3 important areas of your finances that could be affected by declining inflation

After peaking at 11.1% in October 2022, inflation is now declining. Find out what this could mean for your cash savings, investments, and monthly budget here.

Inflation is a subject that you are likely to have discussed with friends, family and colleagues over the past year – and for good reason.

In March 2020, when the Covid-19 pandemic began, the Office for National Statistics (ONS) reports that UK inflation stood at just 1.5%.

Over the years that followed, strategies employed by the government, including the furlough scheme and the gradual reopening of the economy in 2021, led to inflation rising substantially. The ONS says inflation peaked at 11.1% in October 2022 – a 40-year high.

Now, as of July 2023, inflation stands at 6.8%. This comes as a consequence of the BoE hiking the base rate 14 times between December 2021 and August 2023 in order to curb consumer spending and slow rising prices. At their latest interest rate decision, the BoE brought the base rate to 5.25%.

Despite these strategies placing financial pressure on consumers in the short term, it appears the BoE’s interest strategy is starting to work. The rate of inflation is indeed falling, proving that year-on-year price rises are beginning to slow down.

If you’ve become accustomed to rising inflation over the past few years, feeling the effects of its potential decline in the coming months could be unexpected.

So, here are three areas of your finances that are likely to be affected if inflation continues to decrease.

1. Your cash savings

Rising inflation is a normal part of a functioning economy. That’s why the BoE has a target inflation rate of 2% each year.

However, due to inflation rising more steeply than planned in recent years, finder reports that between May 2013 and May 2023, the average cash savings account lost £4,000 in real-terms value.

Indeed, even with higher interest rates, your cash savings are likely to be eroded by inflation over the years. This is one reason why we recommend that our clients split their wealth between saving and investing.

Happily, a declining inflation rate means that your cash savings may retain their real-terms value more easily.

This is not to say that inflation will not have an impact on your wealth; inflation can still be detrimental to your cash over time, even if it returns to the BoE’s 2% target. Nevertheless, you could feel less worried about your money losing value if the rate of inflation falls.

All this to say, there is another inflation-linked element that could have an impact on your cash savings, and that is the interest rate your bank offers.

After the BoE’s recent base rate hikes, many banks and building societies have passed on this rise. According to Moneyfacts, as of 16 August 2023, your easy access savings could now earn 4.8% interest, and you could gain a 5.45% rate if you’re willing to wait up to 90 days to withdraw your funds.

As inflation begins to fall, so too might interest rates. So, while your cash savings’ spending power could increase substantially with a lower inflation rate, the interest they gain could diminish alongside it.

2. Your investments

Inflation can have numerous effects on your investments, depending on the type of asset you hold.

For instance, as you might have seen in your portfolio, when inflation rises, the typically high interest rates that follow can push bond and gilt prices down. This might have led to these assets losing significant value in the past few years.

Conversely, the rising price of commodities means that the value of some of your investments could have risen in line with inflation.

Now that inflation is on the decline, the opposite is likely to be true. Payments from fixed-rate bonds could offer better real-terms value, while commodity assets could decrease in value as prices drop.

What’s more, if inflation had an impact on your spending over the course of 2022, you could have decided to invest less capital into your portfolio. Now that inflation is declining and your money is likely to go a little further, you could look to increase the amount you’re investing again.

Ultimately, though, your investment portfolio will encounter many different “changes in the weather” over the years. As a long-term set of investments, any short-term fluctuations shouldn’t have too big an impact on your goals.

3. Your month-to-month expenditure

Finally, a decreasing inflation rate could be a positive change for your month-to-month expenditure.

Over the past 18 months, you may have felt your budget become squeezed as the price of fuel, food, leisure, travel, and energy rose. Now that things are moving in the other direction, the pressure on your finances might be relieved somewhat.

Remember: inflation is declining slowly. Although your monthly budget could stretch a little further as the months go on, there is no telling what the future holds – so it’s important to continue saving and investing in line with your goals.

Get in touch

To review your financial plan in light of the falling inflation rate, contact us today. 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.

The value of your investment 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.


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