What is inflation?
Inflation is the term used to describe rising prices. It’s calculated by comparing the current cost of essential goods with how much they cost a year earlier, and the average increase is known as the inflation rate.
The UK is experiencing a period of high inflation which peaked at 11.1% in October 2022 and is still 2% above the Bank of England’s target. Although the inflation rate has been falling over the last year, this just means prices are rising more slowly and many everyday necessities remain expensive.
For UK residents, this means reduced purchasing power and savings losing value in real terms because you’re able to buy less with your money.
Investing your money during inflation
- Savings accounts
One of the main methods used by the Bank of England to drive down inflation is raising interest rates. This means that you get greater returns on money stored in bank accounts, especially if you choose fixed-term savings accounts that offer high interest on untouched funds.
However, be mindful that borrowing such as business loans and mortgages become more expensive as interest rates rise. This means that savings from your bank accounts are often offset by other financial commitments in periods of high inflation.
- Stocks and shares
Your money has a greater potential to grow when invested in the stock market rather than in a bank account. This is because investments such as bonds and shares could increase in value over the medium or long term, ultimately surpassing the devaluation effect of inflation. It’s easy to invest these days too, with multi-asset trading platforms and apps accessible via the internet.
However, this potential for ‘beating inflation’ should be weighed up against the risk that you might get back less than you invest. It’s important to research best practices for investing thoroughly before you begin and to be careful with the assets you add to your portfolio.
- Real estate
As a tangible asset, real estate is one of the most secure investment options. The market is also relatively slow to grow and fall which means that properties tend to hold their value during periods of inflation.
Inflation can also slow the supply of new houses while demand naturally remains high. This means that you have more authority in dictating the price and can wait it out for the best bidder.
Having said that, UK house prices fell by 1.8% in 2023 as high mortgage costs priced out many who would have been looking to buy. This is the fastest house prices have fallen in a decade.
Should you aim to beat inflation?
Especially if you have lots of money sitting in old bank accounts, it’s advisable to take steps to protect your finances against inflation. However, you must always assess the risks of investing and purchasing physical assets and ensure you have enough spendable cash to stay in the black.
While there are ways to safeguard your savings during periods of high inflation, ultimately you should be prepared for the devaluation of your finances and other assets.
