Use inflation to increase wealth

Now’s the time to forget saving and start investing

Inflation currently stands at 9% – a 40-year high – and it will probably reach double-digits by the end of the year.

I first wrote about the risk of rising inflation 12 months ago. I felt it was inevitable and professional investors should not be surprised.

There are two primary measures of inflation – the Consumer Prices Index (CPI) and the Retail Prices Index (RPI).

They’re calculated by monitoring the percentage change in the cost of a basket of specific goods over time, with each measuring a slightly different set of goods.

Recent economic conditions have created a perfect storm for inflation to increase. Over the past 24 months or so, central banks around the world have printed money on a scale never seen before.

So, while we have plenty of pounds, dollars, and euros in circulation, because of various lockdowns and restrictions imposed globally, we have a reduction in supply of goods and services. Just ask anyone who is waiting for a new car.

What was unknown and has caused the current inflationary pressures to magnify is the war in Ukraine.

This has further reduced the supply of wheat, oil and other raw materials.

Inflation is normal and we shouldn’t be afraid of it but when its momentum builds, it can get out of control, which typically means things become more expensive quickly.

To control the rising inflation, we are likely to experience further interest rate rises here in the UK.

Some expect this will be by a further two percentage points to help curb the money supply. If you pay more in

We shouldn’t be afraid of inflation, but it is one of the biggest risks to your money

interest, you have less money to spend and more incentive to save, which helps ease inflationary pressure.

Some experts believe inflation has already peaked in the US, and the Bank of England expects inflation to peak sometime this year in the UK. It is forecast to be around 2% in two years.

Something that’s overlooked with inflation is the impact on your cash.

I tell my clients that inflation is one of the biggest risks to their money. Why? Because inflation is effectively a constant tax on the value of your assets – a tax we all collectively pay.

Look at it this way: over the last 15 years, inflation has averaged 2.6%, which to most people would be modest. But that means you would need to achieve at least a 2.6% return on your savings, after tax and costs, to maintain the value of your money.

In other words, you would need £176 today to buy the same goods which would have cost you £100 at the turn of the millennium, just because of inflation.

That’s why I don’t like keeping excessive amounts of money on deposit for prolonged periods of time.

So what can you do? The solution is to invest rather than maintain cash deposits (savings).

The MSCI World index, which is a collection of the world’s largest companies, has delivered average returns of 9.31% per annum over the last 15 years – and even after allowing for fees, you’ll easily keep ahead of inflation.

That’s one reason why the rich get richer during inflationary times. They understand that companies can increase their prices and increase profits, which helps share values rise.

You too can participate and grow your wealth over the next 20 years, even if you start small. We all have to start somewhere…

For more money advice, search for the Money Planner Podcast online.