In an uncertain world it’s hard to predict how high inflation will rise in 2022, and when it will start to decline once more. This month the Bank of England has raised interest rates from 0.50% to 0.75% in an attempt to control inflationary pressures which are being caused by higher food, energy, and fuel prices.
Back in November 2021, inflation was being driven by increased demand for goods as trading returned to normal in the aftermath of the pandemic. The prediction then was for a high of 7% in the spring. That forecast is now being adjusted up to 8%. Economists predict that inflation will begin to fall back to more normal levels in the latter part of the year.
What is the Impact of Inflation?
In the UK we import many of our goods and services, so the most immediate and visible impact on everyday life will be via price hikes in the shops. A corollary of higher prices is a diminishment of the buying power represented by any savings or investments you may have. In the short term this isn’t too much of a problem, but if inflation isn’t successfully controlled it will cause more serious damage.
Are Savings at Risk?
If you have £10,000 in the bank, inflation won’t change the sum. What will change is what you can buy with it. If inflation were to stay at 8%, your savings would fall in value to £9,200. Savings account interest rates would have to be very high indeed to keep up with rising prices, and they’re extremely unlikely to happen.
What About Borrower and Mortgage Holders?
As has always been the case, property is more likely than savings to stay ahead of inflation. If you’re a borrower, you’ll have benefited from years of very low interest rates and this may be about to change to some degree. As interest rates rise, lenders may follow suit in order to protect their profit margin. We won’t, however, be seeing 1970s style hikes.
What Can Investors Expect?
Investors expect to get a better return from their investments than they would from a savings account. In periods of high inflation, it’s often a case of sitting out the uncertainty. Normally inflation finds a way to return to lower levels in the medium term. The challenge is to ensure that your money grows sufficiently to hold its value through choppy periods such as the one we’re currently experiencing.
Need to Review Your Finances?
Inflation can feel scary because it’s out of our immediate control. We can, however, take steps to manage the impact it has on our financial planning for the future. If you feel that it’s a good time to review your current investments, savings or private pension, Harpur Wealth Management can help.