{"id":1376,"date":"2021-10-06T14:33:43","date_gmt":"2021-10-06T14:33:43","guid":{"rendered":"https:\/\/www.brewin.co.uk\/group\/media\/news-and-comments\/2021-10\/what-does-inflation-mean-for-me-and-my-money\/"},"modified":"2024-04-05T14:39:45","modified_gmt":"2024-04-05T14:39:45","slug":"what-does-inflation-mean-me-and-my-money","status":"publish","type":"rbcwm_news","link":"https:\/\/www.brewin.co.uk\/group\/media\/news-and-comments\/2021-10\/what-does-inflation-mean-me-and-my-money","title":{"rendered":"What does inflation mean for me and my money?"},"content":{"rendered":"\n

It\u2019s easy to think of inflation as something that only economists need to worry about. However, research from Brewin Dolphin, the wealth manager, shows that \u00a3100 invested in the stock market in 1996 would be worth \u00a33221<\/sup> now compared with \u00a3131 in cash savings. However, \u00a3100 now would be worth only \u00a354.50 in terms of buying power after 25 years of inflation at 2.5%2<\/sup>.<\/p>\n\n\n\n

Lee Clark, financial planner at wealth manager Brewin Dolphin, says: \u201cInflation isn\u2019t a bill that you pay directly, but it can cost you over the long run. Without careful financial planning, you run the risk of your money\u2019s purchasing power being eroded over time. Taking financial advice could help you avoid this so-called \u2018hidden tax\u2019.\u201d<\/p>\n\n\n\n

What is inflation?<\/strong><\/p>\n\n\n\n

Inflation refers to the way that prices for goods and services increase over time.<\/p>\n\n\n\n

An easy way to measure inflation is to compare the cost of things today with how much they cost in the past. So, if inflation is 2%, it means prices are, on average, 2% higher than they were a year ago. If a loaf of bread cost \u00a31 a year ago and it now costs \u00a31.02, its price has risen by 2%. That doesn\u2019t sound like much, but it adds up over time.<\/p>\n\n\n\n

The effect of inflation is more pronounced over longer periods of time. According to the Bank of England\u2019s inflation calculator, goods and services costing \u00a310 in 1980 would cost \u00a343.85 today. This is because inflation averaged 3.8% over the last 40 years.3<\/sup><\/p>\n\n\n\n

How does inflation affect me?<\/strong><\/p>\n\n\n\n

Figures from Brewin Dolphin show that inflation can significantly reduce the value of \u00a3100 of cash savings.<\/p>\n\n\n\n

Lee explains: \u201cHigher food and fuel bills are the most noticeable effects of inflation. If your salary hasn\u2019t kept up with inflation, you might find your household finances are squeezed. A less obvious effect of inflation is the way it erodes the value of your savings. If you have \u00a3100 sitting in a zero-interest bank account then over time, inflation will reduce the \u2018real\u2019 value of your \u00a3100. After 25 years, you\u2019ll still have \u00a3100, but you\u2019ll be able to buy significantly less with it than you could at the start. For example, \u00a3100 now would be worth \u00a354.50 in terms of buying power after 25 years if inflation was at 2.5%.\u201d<\/p>\n\n\n\n

The chart below demonstrates how inflation can reduce the value of \u00a3100 of cash savings:<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Source: Brewin Dolphin. Impact of four hypothetical rates of inflation on \u00a3100 of cash over 25 years. For illustrative purposes only.<\/em><\/p>\n\n\n\n

Lee adds: \u201cIf you\u2019re saving for a long-term goal, like retirement, then it\u2019s really important to factor in inflation. You might think saving up \u00a3600,000 will set you up for a comfortable retirement but, in 20 years\u2019 time, it\u2019s very unlikely that \u00a3600,000 will go as far as it does now.\u201d<\/p>\n\n\n\n

How do I protect myself from inflation?<\/strong><\/p>\n\n\n\n

To prevent inflation from eroding your savings, you need to ensure your money grows at or above the inflation rate. The rate of inflation changes from year to year, and even month to month. Ten years ago, the rate was above 5%. So even if inflation is low, you can\u2019t assume it will stay that way forever.<\/p>\n\n\n\n

Over the last 40 years, inflation has averaged 3.8%, which means that unless your money has grown by at least 3.8% each year, its real value has fallen.<\/p>\n\n\n\n

Interest rates on cash are typically below inflation and currently very low. The highest rate on an easy access savings account is around 0.6%, while the highest rate on a five-year fixed-rate savings account is 1.8%.4<\/sup><\/p>\n\n\n\n

Research from Brewin Dolphin of the value of \u00a3100 invested in cash compared to the FTSE All Share since 1996, below, shows how investing in the stock market can give your money the opportunity to beat inflation.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Source: Refinitv Datastream and Brewin Dolphin. *Total return assumes that all earnings and dividends are reinvested.<\/em><\/p>\n\n\n\n

Lee explains: \u201cIf you keep all your money in cash, there is a high chance it will lose value over time, which could put your financial plans in jeopardy. Investing in the stock market can give your money the opportunity to beat inflation and grow in value. Equities carry investment risk, but history demonstrates that, over the long term, they tend to outperform cash and produce an above-inflation return.<\/p>\n\n\n\n

\u201cThe important thing to remember is that equities go up and down in value. This means you should invest for the long-term \u2013 at least five years \u2013 and spread your money across different asset classes, sectors and regions. By diversifying your money, you can reduce the impact of one asset or sector falling in value.\u201d<\/p>\n\n\n\n

PRESS INFORMATION<\/strong><\/p>\n\n\n\n

For further information, please contact:
Richard Janes richard.janes@brewin.co.uk<\/a> \/ Tel. +44 (0) 20 3201 3343
Si\u00e2n Robertson: Sian.Robertson@brewin.co.uk<\/a> \/ Tel: (0) 20 3201 3026
Anita Turland: anita.turland@brewin.co.uk<\/a> \/ Tel: (0) 20 3201 4263
Payal Nair payal.nair@brewin.co.uk<\/a> \/ Tel: +44 (0) 20 3201 3342<\/p>\n\n\n\n

NOTES TO EDITORS<\/strong><\/p>\n\n\n\n

Disclaimers<\/u>:<\/p>\n\n\n\n