Why I’m not worried about inflation
This week it was announced that the inflation rate in the UK reached 5.1%; the highest rate in a decade. Whilst this means that your money now is worth 5.1% less than this time last year, I am not at the point of worrying just yet.
What does this mean for you?
In general terms, if you didn’t receive a pay rise of 5.1% or more in the last year, you received a pay decrease in real terms. This is because your money won’t go as far due to the cost of everyday essentials increasing and your wages not keeping up.
If you have been saving for a large item (car, house etc.) unfortunately you will probably need to save a little longer as your cash won’t go as far. This can be demonstrated by the monumental increases in both car and house prices in the last year.
However, if you have been investing over the last year then your returns should have outpaced the rate of inflation, with the S&P500 returning 24.5% over the past 12 months.
Why am I not worried?
I’m not worried because of the last point above. I have managed to consistently invest a strong portion of my income into appreciating assets (the stock market and cryptocurrency primarily). You can see my portfolio here.
As a result, I am expecting the growth of these investments to have, at the very least, kept up with this inflation rate over the last 12 months and to continue to do so in the future.
However, as someone who is saving for their first house I am concerned by the rate at which my Cash Lifetime ISA pot is falling in value over time. To combat this I will continue to invest in my Stocks & Shares Lifetime ISA this tax year, and to open one for the coming 21/22 tax year.
This will allow me to outpace the high inflation rate which I expect to rise over the coming months and years.
What it means for you
The Bank of England has announced an increase of the interest rate to 0.25% which is designed to incentivise people to save money rather than spend it. The reality is that people aren’t going to be locking their cash away for a measly 0.25% unless they were already saving for something such as a new car, house etc.
If you are saving and your bank account currently pays an interest rate below 0.25% then you will receive a higher payment of bank interest every month - don’t go too crazy with those extra few pennies every month!
If you are borrowing (loans, mortgages etc.) on a variable rate, then the interest you pay will increase leaving less money in your pocket.
Whilst this is a small interest rate, those with a mortgage will be hit hard as you owe a larger balance.
How to beat inflation
The best way to beat inflation is to invest in appreciating assets. Keeping your money in the bank at 0.25% means your cash will still be losing 4.85% in value over 12 months. Therefore, to find an asset class that appreciates at a higher rate is the key in beating depreciation.
See our free guide on investing here.
Please note that as inflation rates rise, it can cause some of the population to fall into poverty which can trigger a recession. If a recession does happen stock markets will fall eventually. However, this is the risk of investing and the value of the stock market has always recovered from every crash that has ever happened.
If you have any questions about my thoughts above, please do not hesitate to let me know via Instagram.
Useful resources:
https://www.bankofengland.co.uk/knowledgebank/why-are-interest-rates-in-the-uk-going-up