What Does 3% Inflation Mean For Investors?

Posted on in News

Most of us have an idea what inflation means in practice. It means that the cost of everything we buy goes UP. And our spending power goes DOWN.

Broadly, 3% inflation means that what costs £100 this year will cost £103 next year. It doesn’t seem much maybe. But the cumulative effects of inflation can be much worse than you might think.

For example, 3% annual inflation over a decade would mean that what costs £100 now will cost around £135 in just ten years. (Or looked at another way, your money will be worth only around three quarters of what it is today.)

But, what is often overlooked, is that inflation is a much more serious problem for investors.

For investors, the rate of inflation represents the rate at which the real value of our investments is being eroded. Just as importantly, it tells us the inimum return an investment needs to be making just to maintain its value.

Investors, unless they’re careful, can be more susceptible to the ravages of inflation than anyone else. Because the value of the money we’ve saved goes down just as the cost of everything we buy goes up. So investors suffer a ‘double whammy’.

And inflation is a particularly serious threat to those who just keep their money in a bank savings account.

Think of it this way:

Let’s say inflation is 3% and you manage to find a savings account which pays 3% interest. (Pretty much impossible right now, but let’s say you could.)

You might feel very pleased with yourself. But your money would be standing still at best.

In the real world anything between 0.1% and 1.5% is all you’re likely to get on your savings right now. (And the impact of tax might mean it is actually even less than that.)

In these circumstances your wealth is effectively ‘going backwards’. In effect, in ten years, your spending power will be only three quarters of what it is today

One of the cruel things about inflation is that it means people who put their money in the bank end up poorer than people who haven’t saved and who just frittered their money away. (Which is totally unfair and doesn’t seem right but, sadly, it is!)

Fortunately there is a solution which can help minimise the ravages of inflation, or even make your savings immune from it. And that is to put some of your money into suitable investment products.

In order to beat inflation, savers should look for investments offering returns which are equal to or greater than inflation. It’s a very simple concept: At 3% inflation even a very simple investment product offering a 3% return will ensure that your wealth – and your future spending power – keeps pace with inflation. Better still – and this is perhaps one of the most exciting things about investment – investment products which offer in excess of 3% will actually make you richer in real terms!
Of course, while beating inflation is simple in theory it is a little more complicated than that in practice. That is why we recommend that, if you are interested in protecting your savings from inflation, you take individual advice from a qualified financial adviser on the products that might be right for you.