What’s happening with inflation? Easing of lockdown boosts consumer confidence and unleashes pent-up demands.

Understanding inflation is an important factor when it comes to your financial success. If you don’t factor inflation in when deciding where to put your money – whether that’s savings accounts or investing – you could find your wealth shrinks over the years.

The current causes of higher inflation are largely COVID-related. The easing of lockdowns has boosted consumer confidence and unleashed pent- up demand. At the same time, bottlenecks in production and distribution are squeezing supplies – from building materials to foodstuffs. This supply and demand imbalance has forced up some prices.

The rate of inflation is the change in prices for goods and services over time. On 18 August, the Office for National Statistics reported the Consumer Prices Index measure of inflation saw a surprise slowdown in the year to July, down to the Bank of England’s target of 2% from 2.5% in June.

GROWING REALISATION

A sustained period of low inflation may have blunted some people’s concerns about inflation. But there’s now a growing realisation that high inflation could be around the corner, which reduces your purchasing power and what you could buy with your savings over time.

Some investors and savers may underestimate the damaging effects of inflation on their wealth. Keeping money in the bank typically earns interest, but if the interest rate is lower than inflation, money or purchasing power is effectively being lost.

PENSION SAVERS

People on fixed incomes – such as those whose pensions aren’t inflation-linked or workers on a static wage – are especially vulnerable to the effects of inflation. As living costs rise, your money doesn’t go so far.

Pension savers need to think about what their savings might be worth during retirement – often a long time into the future. Inflation can make the difference between an enjoyable retirement and a frugal, worrisome one.

ABOVE INFLATION RETURNS

That’s why you should consider mitigating the effects of inflation by investing at least some of your money in assets that aim to oer above- inflation returns.

Arguably, we can expect inflation to settle back to lower levels once the post-pandemic surge in demand has been sated and supply chains are smoothed out. But even so, with the global economy poised for a strong rebound, most central banks are keen to get back to ‘normal’ monetary conditions. So rock-bottom interest rates can’t last forever.

GOOD INVESTMENT

Bonds and other assets that pay a fixed income and/or a fixed investment return are especially vulnerable to inflation. Bonds become less valuable as inflation and interest rates rise, reflected in falling bond prices and rising yields.

Conversely, shares are generally a good investment during periods of modest inflation. A company’s fortunes typically track consumer demand and economic growth. If demand is strong, companies can raise prices, boosting the profits from which they pay dividends to their shareholders.

TRACK RECORD

Besides shares, there are other assets with a track record of doing well during times of moderate inflation. These include infrastructure assets, where income streams increase as demand grows and the assets mature.

Likewise, gold and other commodities can be useful stores of value to hedge against inflation. So the good news is that it is possible to get an inflation-beating return on your savings, as there are different investment opportunities. However, these involve taking on a little more risk than with a cash savings account.

TIME TO DISCUSS MITIGATING THE IMPACT OF INFLATION ON YOUR FINANCIAL PLANS?

Inflation doesn’t just affect our everyday expenses, but could also impact our savings, investments and pensions. To discuss how we can help you plan to mitigate the impact of inflation on your financial plans, please contact us – we look forward to hearing from you.

Who are Vizion Wealth?

Our approach to financial planning is simple, our clients are our number one priority and we ensure all our advice, strategies and services are tailored to the specific individual to best meet their longer term financial goals and aspirations. We understand that everyone is unique. We understand that wealth means different things to different people and each client will require a different strategy to build wealth, use and enjoy it during their lifetimes and to protect it for family and loved ones in the future.

All of us at Vizion Wealth are committed to our client’s financial success and would like to have an opportunity to review your individual wealth goals. To find out more, get in touch with us – we very much look forward to hearing from you.

The information contained in this article is intended solely for information purposes only and does not constitute advice.  While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article.

Posted by James Blackham

James particularly enjoys building close relationships with all clients and helping people identify and fulfil their long term financial goals. A highly qualified Financial Planner working towards Chartered status and is also a Pension Transfer Specialist. James is also a partner of Vizion Wealth LLP.

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