What is inflation?
Inflation refers to an increase in the prices of goods and services over time. Inflation is measured using a price index e.g Consumer Price Index (CPI). Many factors can contribute to inflation, such as changes in supply and demand for specific commodities or services, fluctuations in currency exchange rates, and increases in production costs. The government establishes an inflation target of approximately 2%. In March 2023, the inflation rate was 10.1%, down from 11.1% in October 2022.
Impact of Inflation on Savings
Money held in savings hasn’t grown much in previous years due to historically low interest rates. But with inflation now running high, your savings are at risk of losing value in ‘real’ terms as you’ll be able to buy less with your money.
Suppose that over the next year, the inflation rate remains at 10%. An item that costs £1,000 today will likely cost £1,100 in 2024. Assuming you deposit £1,000 into a savings account with an interest rate of 0.5%, you can expect to earn only £5 in interest over the next year and would effectively lose £95.
How to protect your savings
Money Helper service suggests that you should save for emergencies. You’ll need enough to pay your essential expenses for three months. You should be able to cover costs like energy, mortgage or rent, travel and food costs. You can then start saving any extra income in more inflation-proof ways.
You should always shop around to find the highest interest rate possible on your savings. In times of high inflation, this is more important than ever. Consider investing in stocks and shares with pricing power. Companies with pricing influence can elevate their prices to keep up with inflation, which aids in safeguarding your investment value.