Inflation: Beware the invisible killer

By David Penney

Inflation is back.

Often one of the most misunderstood economic phenomena, inflation is difficult to forecast and even more difficult to control.

It can have a wide range of impacts on the economy, not all of them negative, but for the individual it can cause a serious pain in the pocket.

In the UK, the inflation rate is currently running at its highest rate for a decade, breaching 5% last November and it has been creeping north ever since. In the US it is running at an almost 40-year high at more than 7%.

And the truth is there is a significant possibility that inflation could continue to rise – or at the very least stay stubbornly high – before it starts to come down again.

It is impossible to point to a single factor that is driving up the cost of those 700 goods and services that are used in the UK to assess the rate of inflation but a combination of low interest rates, Covid, Brexit, supply chain challenges and increased energy costs are all now finding their way back to prices generally.

In terms of how inflation is calculated, it is something of a moveable feast – last year hand gel and men’s lounge wear were added to the inflation shopping basket and electric cars and smart watches are also recent additions and it is a basket that will continue to evolve in line with consumer trends.

However, regardless of what is in the nominal basket of goods, the upshot of this rising trend for the average man or women in the street is that it is starting to have a significant impact on the value of the pound in your pocket and its purchasing power.

And for those with savings, the former US President Ronald Reagan was pretty close to the mark when he described inflation as “a violent as a mugger, as frightening as an armed robber and a deadly as a hit man”.

One way that inflation has traditionally been held in check is through increasing interest rates, making debt more expensive and theoretically putting the breaks on consumer spending and business investment, each of which put upward pressure on prices.

We recently saw the Bank of England increase interest rates from its historic low by a quarter of one per cent and we should probably expect another increase in the not too distant future, both in the UK and the US.

However, with many of the problems fuelling price rises being supply side related, dampening demand is unlikely to deal with the core issues at play. As I read in a recent commentary about the issue, with interest rates at such a low base, it is akin to trying to spear a T-rex with a toothpick.

The good news, if you can call it that, is that we are a long way from when inflation peaked in the modern era at 18% exactly 40 years ago but the less favourable news is that this inflationary period is unlikely to go anywhere soon.

This means that those who do have cash in the bank should be seriously considering taking action to mitigate the impact of inflation because in today’s low interest rate environment, beating inflation with a savings account is an impossible mission. 

Indeed, in a period of high inflation and ultra low interest rates, you really don’t want to hold more cash than is necessary for any length of time and right now if your savings are in a bank or a building society then they are probably earning a real return of -4% and this is likely to be true for at least the rest of 2022.

Depending on risk profile, there are a number of opportunities to consider, from investing in stocks (the FTSE 100 and FTSE All-Share regularly delivers returns above the current inflation rate) to putting as much as possible into different tax shelters, be that an ISA or into a pension, both of which have significant tax benefits as well as potentially offering valuable long-term growth.

Inflation really doesn’t discriminate, impacting every one of us. It is a silent killer that can have a devastating impact over the long term. 

As author Venita Van Caspel said, “inflation takes from the ignorant and gives to the well informed” so it might just be the right time to take stock and consider taking action to maintain the value of those savings that you have worked so hard for. 

The Partner Practice is an Appointed Representative of and represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group's wealth management products and services, more details of which are set out on the group's website The 'St. James's Place Partnership' and the title 'Partner' are marketing terms used to describe St. James's Place representatives.

Penney Financial Partners is a trading name of Penney Financial Partners Ltd. Penney Financial Partners Limited is registered in England and Wales, Number 09964340. Registered Office: Kensington House, Knights Way, Battlefield, Shrewsbury, Shropshire, SY1 3AB, UK