Inflation – a rise in prices for goods and services – has a significant impact on people’s spending power. As prices rise, and income levels stay the same, people are likely to see their spending power reduce in real terms.

To combat soaring inflation, the Bank of England raised interest rates from 0.25% to 0.5% in February. Higher interest rates make borrowing more expensive and encourage saving, which in turn reduces how much people spend overall, helping to keep inflation down.

However, this interest rate rise will likely not be enough to bring down prices and a series of further increases are widely anticipated this year. At the same time, inflation is forecast to climb further due to rising energy prices and is likely to peak at 7.25% in April – the highest level since August 1991.

High inflation impacts on people’s spending power, as well as their income, savings, and their overall wealth. So, in the current environment, savers may wish to turn to investing in order to protect their wealth from being eroded further by inflation.

How inflation can erode the value of your savings over time

The rising cost of living, which is predicted to deteriorate further in the coming months, is already having an adverse impact on savings. According to a recent survey of over 2000 adults, conducted by Accenture, 1 in 4 reported that they are unable to save any money on a monthly basis, with 66% saying that the rising cost of living has impacted on their ability to save money.

As well as impacting people’s ability to save, inflation can also erode the value of your savings over time, where the rising cost of goods and services reduces the purchasing power of your money. For example, the current rate of inflation means that £100 from a year ago would only buy £94.50’s worth of the same basket of goods now.

Whilst many people think cash is a safe home for their money, inflation can be a silent killer, as cash savings are unlikely to earn enough interest to outpace inflation. Low-interest bank accounts effectively lose money during periods of inflation. For example, if interest rates on cash accounts are 1%, but inflation is running at 2%, you are actually earning a negative return of 1%.

Rising interest rates should benefit savers, but despite the Bank of England raising interest rates to 0.5% in February, it can take a while before this is passed onto consumers, through increased interest rates on saving accounts.

Investing for inflation

The only real solution to combat inflation is to invest. By choosing investments that will give you a greater return than the current rate of inflation, or keep up with it, you can protect yourself from rising prices.

Here are some of the areas you may wish to consider when it comes to investing for inflation:

Asset-based areas

Investment assets are tangible or intangible items that offer growth or appreciation, rather than just income, such as shares, bonds, and stocks. Collating a portfolio of assets that have the potential to increase in value and earn higher returns over the long-term is a sensible option.

Assets with variable interest rates

Certain assets such as bonds or shares are priced on the fixed interest they pay, and if something pays a fixed rate, you will lose money when inflation is increasing.

In contrast, assets with fluctuating interest rates rise with inflation, meaning their worth increases as inflation rises. These are likely to be real assets: tangible investments with an intrinsic value such as energy, real estate or infrastructure.

Equities have proved to be successful historically

Stocks tend to hold up better during times of inflation, especially if inflation comes with growth. However, you will need to be prepared that your investments will rise and fall in value. Whilst stocks have a reasonable chance of keeping pace with inflation, not all equities are equal. It is important that you look to diversify your investments across varying stocks to ensure that you are not overexposed to any one area.

Investors should focus on companies in the consumer staples sector (food and beverage etc) that can pass on rising costs to customers.

Diversify across different types of investments and be prepared to take a risk

A well-diversified investment portfolio may fluctuate on a day-to-day basis, but over time it can offer a sensible way to help beat inflation and will compare favourably with cash over the long-term.

Spreading your money around a variety of relatively safe assets (as mentioned above), alongside some equities gives the best chance of your money maintaining value over the medium to long-term.

Ultimately, to preserve the value of your money during times of inflation, you need to be prepared to take more risk than the safety which a savings account provides.

How we can help

When it comes to investing, no one solution fits all. And the volitivity of the current economic climate makes it more important than ever to seek tailored, and precise advice.

At Smith Cooper Independent Financial Solutions, we work closely with you to recommend an investment strategy that will achieve your financial goals and lifestyle objectives.

But we don’t stop there. Regular reviews of your investment strategy enable us to take into consideration changes in legislation, and personal circumstances and continually adopt the investment strategy to suit. 

For further information on investing in times of inflation, please get in touch with our specialist team today, who will be more than happy to provide advice.

Please note: The value of investments and income from them can go down. You may not get back the original amount invested.