How Does Inflation Affect Savings?

6 December 2022 By James Maxwell
money bag, upward arrow, coins, clock
iStock/Elena Lukyanova

James Maxwell is a wealth adviser with United Advisers Marine. UAM is a member of Nexus Global. The published information was correct at the time of preparation and does not constitute investment advice. You should seek advice from a professional adviser before embarking on any financial planning activity. +34 871 115 928;

A perfect storm of post-lockdown recovery, supply-chain issues, and soaring energy and fuel prices have pushed up the cost of goods and services across the world.

In the UK, inflation has jumped to its highest rate in a decade. In Spain, it has surged to a 29-year high and in the U.S. it’s at 5.4 percent. A high inflation rate means consumers’ money won’t go as far as it did before. We might shrug when we see that a chocolate bar has increased in price, but when we see it reflected in the cost of a pint, a cinema ticket, and a holiday, it can be frustrating. Some economists argue that a little inflation can be good for the economy because it encourages people to spend. When people know that prices are going up, they’ll be more inclined to buy sooner rather than later. It affects salaries too.

In Pride and Prejudice, Mr. Darcy was considered one of the richest men in Britain. He earned £10,000, which in today’s money isn’t even high enough to reach the Personal Allowance. An increase in income sounds like a good thing, but many salaries fail to keep up with inflation. When salaries do increase, this can lead to further inflation anyway. Employers might increase the cost of their goods and services to meet the growing demands of doing business.

Governments pour a lot of resources into tracking inflation and trying to keep it low, but it is difficult to control because there are many factors that can cause it, including cost of materials, taxes, economic recovery, falling interest rates, and the government printing more money. Inflation doesn’t affect everything at once. If the cost of everything went up at 100 percent a year and so did everyone’s income, it wouldn’t do any harm. (It would be a little pointless, though.)

The impact inflation has on your own finances will depend on your personal circumstances, job, and what you consume. For example, when the price of petrol goes up, you’d be forgiven for thinking cyclists won’t be affected. But while they won’t be paying for petrol themselves, the goods and services they use might change as businesses try to make up for a rise in costs.

Inflation is bad for savers because when you combine rising inflation with low interest rates, it’s difficult to get a good return on your money. The money you’re pouring into your savings now won’t be as valuable years later. Inflation can also affect borrowers. Loan rates are often higher and interest-free periods are shorter. Accessibility criteria for mortgages can also be tightened, making it harder for people to buy a house.

We’re living longer than ever before, meaning it’s crucial to mitigate the impact that inflation has on savings. If you’re 60 years old now, you have a one in four chance of living into your 90s. Unless we find ways to grow our savings, its value will soon be eroded in our old age.

This article originally ran in the March 2022 issue of Dockwalk.


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