The topic of inflation has been taking over news sites in recent months as the cost of living continues to rise. This has been putting a significant strain on households across the country, leaving many with no choice but to cut back on many essentials just to keep their outgoings down. What’s more, the Bank of England warns that inflation in the UK is expected to reach 11% this year, so the cost-of-living crisis is unlikely to slow down until, at least, next year. But how does a high inflationary environment impact your savings and what precautions can you take to make your money stretch further?

What is inflation?

Inflation is the price of consumer goods and services rising over time, often due to a surge in demand. In other words, it’s the rate at which our shopping, fuel, and leisure activities, for example, start to cost us more on average.

A key inflation metric is the Consumer Price Index (CPI), which tracks the prices of common consumer products. For example, if a bottle of milk cost £1 a year ago and it now costs £1.05, that means inflation has risen by 5%.

To keep inflation under control, a target is normally set by the Bank of England. This usually sits around 2%. However, year on year to May 2022, inflation grew by nearly 8% in the UK, hitting a 40-year high at 9.1%. These changes were primarily led by the rise in the cost of household services, energy bills, and fuel.

Inflation in 2022

Inflation isn’t all doom and gloom if kept under control, but a key reason why it’s currently so problematic is simply that the changes are happening so rapidly. This means that the things we regularly buy to sustain ourselves are becoming too expensive too quickly, and wages are lagging behind.

A large portion of the current state of inflation is the knock-on effect caused by the pandemic over the last two and a half years. As general habits changed drastically during lockdown and the demand for various commodities dropped, numerous industries crumbled under the pressure. Now, as the world attempts to recover, a financial strain is caused as businesses and suppliers try to claw back two years of missed or reduced revenue.

The Ukrainian invasion also adds to the tough situation, particularly in terms of fuel prices. As a key source of oil has been cut off from the UK supply chain, production has reduced while demand remains high, causing a gap that struggles to close.  

The tip of the iceberg is the pound having dropped significantly in value against the dollar for the first time in two years, which contributes to the economic strain that we’re currently facing. With sterling now valued below $1.19, economic growth in the UK is a sensitive subject. But as we wait for the return of a dynamic economy, what can investors do to make the most of their wealth?

How inflation affects your savings

Inflation impacts everything, and it’s crucial when it comes to cash savings as it will affect your buying power and it determines how – if at all – your money grows over time. Not only that, but inflation can also influence how much you’re able to save. With the cost of living at an all-time high, your outgoings are likely to increase, leaving less to dedicate towards savings.

In a high inflationary environment, it’s important to be mindful of how your savings perform against such economic changes. The below graph shows several examples of how inflation can deflate the value of £100 in cash savings.

Essentially, the higher the rate of inflation, the more erosion your cash savings can face. Looking at the lightest line as a representative of the current inflation rate, it creates the harshest depreciation of monetary value over the long term. Looking at today’s rates in 5 years’ time, £100 could be worth the equivalent of £60. So, with inflation at an all-time high, buying power is significantly reduced, meaning that your money won’t stretch as much as it could.

What you can do to protect your money

With inflation predicted to continue to rise further in the coming months, it’ll be a while before we reach the 2% target. Even once the target is hit, there could be a delay in it having any real effect on the value of savings as we wait for interest rates to catch up and offer substantial value to savings accounts.

In the meantime, a possible option to help protect your funds is simply to wait for inflation to come back down. It’s easy to focus on the present, but it’s also important for investors to look ahead and remember that, while inflation may be worryingly high now, it won’t last forever. Another alternative is to make medium to long-term investments in inflation-beating assets. While these do involve locking your money away for a long period, they could offer greater potential to grow your wealth over time, particularly while inflation is sky-high.

Which investment types are inflation-resistant?

If you’re considering investing, here are a few methods that could help generate profit during an inflation surge:

1. Stocks

Investing in long-term value stocks could offer a significant hedge against inflation. Value stocks are shares in established, mature companies which, unlike start-ups, can present a steadier opportunity for growing your investment and the potential of compounding via dividend returns.

2. GILTs

Similar to TIPS (Treasury Inflation-Protected Securities) in the US, GILTs are UK government-issued bonds that are index-linked. This means that, at the point of bond maturity, your payment will match the current inflation rate, effectively protecting your investment against inflation. GILTs are also useful if you’re a risk-averse investor as they’re issued by official government bodies, offering a level of protection to your investment.

3. Bonds

While the rates of return offered by bonds can be lower than stocks, they’re an inflation-beating investment that’s worth considering as rates are often fixed, meaning that your profit isn’t affected by changes in inflation.

How to alleviate the impact of inflation

“While the Bank of England predicts such a level [of inflation] to be temporary, even the government target of 2 percent cannot be beaten unless savers lock into a five-year fixed bond.”

Rachel Springall, Finance Expert at Moneyfacts

Investors are turning to more predictable means of growing their money, and the great advantage of fixed-rate bonds is knowing exactly what you’re going to get without the worry of your profit being diminished by high inflation.

If fixed-rate bonds are of interest to you, at Propiteer Capital, we offer returns of up to 9.5% pa with our simple investment bonds. With a secure charge taken against profitable, high-quality UK property, your investment is backed by credible and recession-resilient assets, giving you peace of mind when you need it most. Funds are dedicated to a range of asset classes, including:

Residential Rentals

·         Renting of completed buy-to-let apartments

·         Popular locations in transient cities

·         Purpose-built quality living units

·         Acquisition decisions based on rental income

·         Recession-resilient asset class

Branded Hotels

·         Occupancy delivered from Hilton and Marriott booking engines with 230 million members combined

·         High-demand locations

·         Up to 20 years’ regional exclusivity per hotel

·         Ultra-efficient ‘focused service’ models for higher profits

·         Both hotel brands have 7 ‘focused service’ sub-brands to help target each geographical region

Development Property

·         Build-to-sell projects completed and sold to release development profits

·         Cover UK’s most robust locations

·         A Private Rental Scheme running in Dublin, Europe’s fastest-growing economy with unit values based on rent

·         Robust against inflation via quality properties within the London halo effect and high demand growth regions

·         Private rental schemes valued on high yields and become more popular during recessions

If you’d like to find out more about Propiteer Capital and our listed bonds, visit our website, or browse our development portfolio here to see the types of projects that you can get involved with. You can also reach our friendly customer service team on info@propiteercapital.com or 01376 319 000 if you have any questions and would like to know more.

Rates are accurate at the date of publishing. For our latest rates, please visit our homepage.

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