High inflation and the rising cost of living manifest in so many ways, and even those of us working outside of the financial services are probably encountering proof of it every single day of the week right now. From rising bills to the cost of fuel, skyrocketing prices at the supermarket to the impact on mortgage payments, childcare and public transport, none of us need to be reminded of the financial upheaval 2023 has brought with it.

But there’s always a temptation, no matter how often we have to face those reminders, to bury one’s head in the sand and avoid thinking about the true scope of it all. After all, when ‘getting by’ is made trickier, revisiting the finances and working out where you stand isn’t always a welcoming thought.

But focusing on the subject in the first place is the hard part. With sound financial advice from an independent, expert advisor who knows how to optimise your finances in order to reach your goals, you can take back control and stop feeling as though navigating these next few months is a case of feeling your way through the dark.

With that in mind, here is our complete guide to inflation – and how it impacts your savings and investments.

The UK, Inflation, and How it Affects Us

Understanding where you fit in the puzzle means understanding the root cause of the issue.

Inflation is a complicated subject with no simple solution. The term itself merely refers to the rising cost of things – food, metals, fossil fuels, raw materials, or anything else. The average cost of a loaf of bread in 1973 was 11½ pence. As a result of inflation, that cost had reached £1.15 by 2022.

Obviously, it’s not quite as bad as it sounds; wages have steadily risen to match inflation, which is why you can no longer buy a bag of sweets for tuppence or a brand-new house for £1,000.

2023 represents a ‘perfect storm’ for inflation. The lingering effects of Covid-19 on global production and supply chains along with food and energy shortages, war, and Brexit have all impacted the UK economy over the past few years.

The Bank of England’s target for consumer price inflation (CPI) is 2%. This keeps things predictable and steady, and it enables people to plan ahead with their finances. CPI dropped well below 2% throughout 2020 when our spending patterns changed as a result of lockdown but, right now, we are far above that target. In February, the inflation rate was 10.4%

This is what we have been seeing in supermarkets, restaurants, retailers, transport – anywhere that we have seen our buying power decrease.

For individuals, inflation isn’t one big problem, but lots of little problems that add up, and make it that much harder for us to reach our usual financial goals.

When Will the UK Economy Recover?

The summer of 2024 has been earmarked as the earliest opportunity we can expect to see the economy behave more like it did in 2019, pre-pandemic. That’s not to say things will stay exactly as they are until that point, but that positive progress will be slow.

This is a better prediction than we had last year, in November, but the outlook is still bleak, with millions of households struggling to cope – and many more facing months of low buying power.

How Does the Cost-of-Living Crisis Impact Savings?

The most significant impact high inflation is having on savings is our ability to save at all. In a NerdWallet survey of more than 2,000 people, 46% of respondents had reduced or stopped paying into their savings accounts as a result of the cost-of-living crisis. This is far from ideal, as our savings represent that first line of defence against an unpredictable economy.

But what about money you’ve already saved?

Inflation isn’t going to cause the number in our savings account to go down. The bank isn’t about to start draining these accounts, so the money you’ve saved isn’t at risk – but your buying power (both now, and in the future) is.

This is because the interest rates offered by banks on savings accounts rarely reflect inflation. The purchasing power of £5 back in 1975 was a lot higher than it is now. With inflation, £5 in 1975 would be the equivalent of £35.95 today. If, however, that £5 had been put into a low-interest savings account, then it still wouldn’t get you very far today. The number wouldn’t have gone down, but the purchasing power would have.

This is what is happening to money left to idle in low-yield savings accounts today. It’s losing buying power. By July 2022, the average savings account in the UK had lost just over £1,000 in value since 2017.

While banks do respond to inflation, the positive impact on your money will be minimal. Interest rates have been very low for a few years now, so it’s unlikely your savings are getting much of a boost. Money saved will lose less buying power than cash in hand, because of the small boost offered by interest over time, but it’s not a big difference.

What does this mean? It means that, in order for you to put your finances in the strongest position possible, you’ll want to take advantage of alternatives for saving and investing your money, so that you can feel more secure in your future buying power.

How Does Inflation Impact Investments?

For starters, inflation has made the idea of investing riskier. Now, there are still plenty of low-risk options for those looking to invest, but the cost-of-living crisis (and the ways it has unsettled our finances) has led to a rise in ‘easy opportunities’ to make a quick investment through an app or user-friendly website, which promises to do a lot of the heavy lifting for you.

The appeal of these apps is obvious. Investing is a complex subject, and the average individual looking for a better way to extract value from their savings sees them as a quick, low risk fix to their worries.

The trouble is, you can’t circumvent the complexity of building a strong investment portfolio. You can make the process a lot clearer, simpler, and safer with professional, independent advice tailored to your financial situation, but an app can’t do that for you.

As inflation continues to undermine savings – and more individuals look for a way of overcoming uncertainty and fear of the future – it’s likely these amateur investments will continue to grow, but it’s important to rise above the noise and underpin any investments with solid advice.

But what about the impact of inflation on investments made with that guidance?

Different types of investments benefit (and suffer) differently as a result of high inflation. This is why financial advisors always recommend that investors hold a diverse portfolio, so that any negative impacted investments have the chance to be offset by positive impacts on other investments.

Bonds can suffer quite a lot from inflation. Unless they’re linked with inflation (in which case, the coupon payments would have risen this year), buying power will be reduced when inflation is high.

Some investments such as gold are considered as protection against inflation although it’s rarely as simple as that and these investments can be high risk – another reason to seek tailored advice.

Is it Good to Invest During Inflation?

It can be, although that depends on the nature of the investment – how tolerant you are of risk, and how your finances currently look. It’s not a fix-all solution, particularly not in the short-term, so investing when you’re already struggling with rising costs may not be the best choice.

If, however, you’ve got a healthy savings account but want to extract a lot more long-term value out of it, then investing can be a better way to weather the storm of inflation.

In essence, it all depends. Talking things through with your financial advisor, free from any bias or agenda, is the best way to ensure you’re doing what makes sense for your finances.

How can you keep money safe during inflation?

The key thing is to remember that there’s no universal solution to weathering economic difficulty. If there were, inflation would hardly make headlines. That’s not a reason to despair, however, as there are plenty of ways to keep your money protected, and maximise your monthly income.

Another thing to remember is that a cost-of-living crisis like this one can put the spotlight on our immediate futures. The next month or six months, for instance. It’s important to make a plan-of-action for managing your money right now, but it’s just as important to keep one eye on the horizon. Inflation causes its own complications for pensions and retirement, which should act as a good reminder that we all need to start planning ahead sooner rather than later.

The first thing you’ll want to do, however, is consider some practical ways to make your money go further. Common tips like cutting out unnecessary expenses – for instance, unused subscription services and memberships, or switching brands at the supermarket – can make a big difference over the weeks and months. Remember, the impact of inflation on individuals is an accumulation of lots of smaller problems, so embracing a variety of smaller solutions is often the best policy.

You may need to revisit your saving goals. As we mentioned above, a lot of households have found that the rising cost of everyday expenses like food, fuel, and energy have made it tougher to pay regularly into the savings account – but that may mean it’s a good opportunity to re-think how you save, as well as where.

It’s also very important that you consider ways to insure and protect your income.

Protecting your income during economic uncertainty

The last few years have proven to us quite how hard it is to plan for every eventuality. The Covid-19 pandemic saw plenty of strong industries, like travel, brought to their knees, meaning many employees, business owners, and investors saw a drastic change in their finances.

Since then, finance has remained a tricky subject for many, and high inflation is making it tricky for many to regain the balance they had enjoyed prior to 2020.

As we mentioned above, the temptation is to home in on the present – to focus on reducing weekly expenses, and getting as much as possible out of the monthly income. This is important, but it’s very important we also consider the risks that are still (and always will be) out there.

From income protection to critical illness cover, there’s a wide range of options out there for you to protect yourself against worst-case-scenarios. This is important whether inflation is high or low, but particularly important if you’ve struggled to save and invest consistently over recent years.

Again, this is a matter to talk through with your advisor. Independent advice is essential here, as you don’t want to be talked into a particular product unless it is really the right one for your unique circumstances.

Taking on new expenses at this time may not seem ideal, but insurance and protection represents a significant step toward a more secure financial future, whatever the economy is doing.

These are (still) trying times. Since 2019, our ability to weather storms has been put to the test, particularly when it comes to stretching our finances and trying to get the very most out of our savings in order to put some plan in place for the future. It is possible, provided you are able to talk through the specifics of your finances, income, savings, and financial goals with an expert – someone who can put things into an order that makes sense, rather than simply selling a product that doesn’t do as much for you as it could.

Financial advice isn’t just for professional investors or business owners. Get in touch with us today so that you can start talking things through with one of an independent and experienced financial advisor.

The value of investments can fall as well as rise and you may not get back the amount originally invested.