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What high inflation means for your money (and why you shouldn’t panic)

Now that UK inflation has hit double digits, it’s easy to get spooked by the doom-and-gloom headlines, but this is no time for knee-jerk reactions.


Remember when rising inflation wasn’t in the headlines? You’d have to go back over a year or so. And you’d have to go back forty years to find a UK inflation rate as high as today’s. After breaching double digits at 10.1% in July, it dipped just under (9.9%) in August, and is expected to rise again. Still, this is the highest it’s been since 1982.

And that’s an important thing to remember – it’s not the first time we’ve been here. It’s been this bad before and things have improved, and they will again. In the meantime, what’s needed is patience and resolve. Let’s dig a little deeper.

Where we’ve come from

We may be suffering a repeat of 1980s inflation highs, but rewind to 1975 and you’ll find UK inflation at 24.8%! Just as in the seventies, one of today’s biggest triggers has been an energy crisis. But unlike the Winter of Discontent, today there’s less pressure for wages to keep up with inflation, and the Bank of England is primed to take steps to dampen the economy. These two differences alone mean we shouldn’t expect the same dizzying heights as fifty years ago.

Let’s not forget that we’ve just had an incredibly easy run with inflation. Since the early nineties up until last year, the official UK rate has largely remained under 3%. That’s an unprecedented thirty years around the Bank of England’s ‘Goldilocks zone’ of 2%. Arguably, something had to give.

Still, this offers little comfort when times are challenging. And with no quick fixes for the key drivers – a pandemic and a war – we can expect high inflation to stick around for a while. So how can we ease the pain?

Your spending and income

The official inflation rate is based on the cost of an average shopping basket of goods and services, so your personal inflation rate may differ from the next person. If you drive a car with a 4-litre engine, for example, you’ll feel the shock of increased fuel prices much more than someone with an electric car. And a family with four kids is likely to see a significantly higher food bill than a couple with no dependants.

While it’s possible to make a difference by curbing your shopping list, when everything costs more, there’s only so far you can go without compromising your quality of life. Even once you’ve trimmed the fat, you may still find you need more income than before to get by.

Easier said than done. Most employees won’t receive a pay rise that outpaces the current trajectory of inflation. The State Pension, with its 3.1% increase this year, also falls short. If you’re receiving an annuity or final salary (also known as ‘defined benefit’) pension, you’ll find the income has to stretch further than before too.

At times like this, you may need to turn to your savings, investments and other assets to make your money go further.

Your savings and investments

While you can benefit from adjusting your short-term behaviour when it comes to spending, you should always have a long-term mindset when investing. The tried-and-tested way to beat inflation – or any other external challenge – is to have a globally diversified portfolio invested in a range of assets and markets over time.

Cash will continue to lose value by failing to keep up with the cost of living. Interest rates may be creeping up, but no savings account will come close to beating today’s inflation. Other lower risk, fixed interest assets like bonds tend to underperform too, but because they still tend to beat inflation over time, they earn a rightful place in a well-diversified portfolio.

With long-term returns usually averaging double digits, stocks/equities are an essential inflation-beating tool. Times are tough but, for some, business is booming. While Netflix has lost a million subscribers as people tighten their belts, British Gas owner, Centrica, announced profits of £1.3 billion ¬(a five-times increase) for the first half of 2022, and Shell netted £10 billion between April and June. No matter how you feel about the justice of that, it’s good news for their shareholders.

Don’t panic!

As long as your money is invested in a diversified portfolio that suits your risk appetite and investment timeline, there’s no reason to change course in the face of high inflation.

At Goodmans, we’ll keep a clear head, whatever the headlines say. We’ll fine-tune things when appropriate to get the best outcomes, but we’ll never veer away from the key principles of good investing. That’s why we build our portfolios to beat inflation over the long term, and that’s why they’ve outperformed over 90% of similar funds over the last decade. So go ahead and read the news, but rest assured that we’ll look after your portfolio with the usual rational, evidence-based approach, wherever inflation goes.

Contact us if you'd like to check your financial arrangements are in the best shape for the challenges ahead.


Fernanda de Gouveia