Get smart to stay ahead of inflation

My top tips to make your money work for you

Inflation is nothing to be afraid of but when its momentum builds, it can get out of control – and that’s when prices go up.

When too many pounds chase too few goods or services, the demand for them increases. This can cause costs to rise which, over time, is what we refer to as inflation.

There are two measures of inflation – the Consumer Price 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 last 18 months, banks around the world have printed money on a scale that’s never been seen before.

We have plenty of pounds, dollars and euros in circulation – but because of various lockdowns and restrictions imposed globally, many goods and services are in short supply.

What the headlines don’t tell you is that periods of low inflation tend to last for a long time.

A good example is what we’ve experienced over the past decade.

We haven’t seen high, or even moderate, inflation for more than 10 years so I don’t think we will see it skyrocket in the near term.

Will inflation pick-up? Probably, but that would be healthy for the economy if it’s at a modest amount.

Last year, the rate of inflation in the UK was 0.9% and it’s currently 1.5%. By 2025, it’s expected to rise to 2%.

To put this in perspective: in 2017, we had inflation at 2.7%, and the Government’s target rate is 2%.

Something that’s often overlooked with inflation, though, is the impact it has on your own cash.

I tell my clients that inflation is one of the biggest risks to their money because it is effectively a constant tax on the value of money and assets.

In the past 20 years, inflation has averaged 2.8%, which to most people is modest. But that means you would need to achieve at least 2.8% returns on your cash savings, after tax and costs, to maintain its value.

In other words, you would need £178 today to buy the same goods that would have cost you £100 at the turn of the millennium.

Inflation is like carbon monoxide to your money – it’s a silent killer of wealth creation, which few people are aware of. So what can you do? Well, the solution is to invest rather than maintain cash deposits or savings.

The MSCI World Index – a collection of the world’s largest companies, has delivered 7.58% pa average returns over the past 20 years for UK investors.

Even after allowing for fees, you’ll comfortably keep ahead of inflation.

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

You too can participate and grow your wealth over the next 20 years.

It doesn’t matter if you only start small – but you must start.

For more money and investment ideas, search for The Money Planner Podcast online.

Inflation is effectively a constant tax on the value of your money and assets