How can you manage rising inflation through your personal finances?

As prices continue to rise this year, inflation has increasingly become top of mind for many people in the UK. With the Bank of England (BoE) expecting it to reach between 6 and 7% by the spring – something not seen in 30 years – there is understandable concern around the cost of living.

While the progressive rise in the price of goods and services over time is part and parcel of any economy, it’s the speed of that rise that keeps members of the BoE’s Monetary Policy Committee up at night. UK inflation is currently 5.4% for the 12 months to December – more than double the bank’s target of 2%. This is in part due to Covid-related supply chain disruptions and sharp rises in energy and fuel prices.

To try and curtail this, the BoE raises interest rates to make saving more attractive and borrowing more expensive – so that people spend less, demand falls and, in theory, we see downward pressure on prices.

To that end, in December 2021, the BoE took rates from 0.1% to 0.25%, and have since raised them further to 0.5%.

However, despite these expected rises, there remains a big gap between interest rates and inflation. And with inflationary pressures expected to ease in the latter part of the year, as energy prices stabilise and supply chains return to normal, the difference between what your money can earn you in interest and what you can afford with it could become a real problem.

High net worth individuals often feel this more acutely than most because high end goods and assets – from handbags to houses – can rise in price many times above the inflation level.

WHAT DOES INFLATION MEAN FOR YOU?

In simple terms, the continued increase to the cost of living means that, if the interest paid on your long-term savings isn’t keeping up with inflation, you won’t be able to buy as much with it in the years to come. And the BoE’s very own inflation calculator shows that the cost of goods and services has almost doubled in 25 years.

With interest rates at historic lows, protecting your wealth both now and for the future becomes ever more important. As Coutts Financial Planning Specialist Chioma Patrick stresses, “You can't stand still anymore because it’s possible you’ll need significantly more money than you think to plan for your future.”

WHAT CAN YOU DO?

This era of ultra-low interest rates means we can no longer expect money for nothing. So how could you keep the value of your money above rising prices? According to Chioma, it’s worth considering a two-pronged approach.

Investing could be one of the most important steps towards mitigating inflation. As Chioma points out, “The stock market is one place worth considering if you want to combat the effects of inflation.”

She stresses that the suitability of the assets you invest in is key. For example, in the UK, value stocks such as utilities and consumables have potential advantages as the companies involved often raise their prices to maintain margins during inflationary periods.

Having a diverse portfolio is also important. Real estate and property-related products, inflation linked investment bonds (TIPs), bank stocks and commodities could all offer a hedge against inflation.

Markets may fluctuate but by diversifying your investments, for example by holding bonds as well as equities, you could have assets that still perform well during moments of market volatility. Staying invested for the long term could also help average out a lower exposure to volatility over time.

Do keep in mind, though, that the value of investments, and the income from them, can fall as well as rise and you may not recover the amount of your original investment. You should continue to hold enough cash for any short-term needs or emergencies.

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“In an inflationary environment, financial planning for the future becomes even more important, and clients should consider all their options to ensure they have enough to support both themselves and their families,” says Chioma.

“This is especially true once you’ve retired, as you’re no longer earning and will need to rely on your assets.”

Long-term financial planning – everything from your will to your pension, from inheritance planning to protecting your assets and your family’s future – could help you make the most of your money over the years to come, for yourself and those closest to you. Fees and charges apply for such services, but you could find that the benefits they bring are worth it.

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