Inflation and the rising cost of living have never been far from the headlines over the past few years. A combination of global events including the Covid-19 pandemic and the war in Ukraine led to significant price rises.
As a result, according to the Office for National Statistics (ONS), inflation reached a peak of 11.1% in the 12 months to October 2022.
Fortunately, price rises have slowed, and the rate of inflation fell in recent months. Indeed, the ONS reports that inflation was 1.7% in the 12 months to September 2024.
However, ONS figures show that inflation rose again to 2.3% in the 12 months to October 2024.
Additionally, during her Budget announcement, Rachel Reeves revealed that the Office for Budget Responsibility (OBR) predicts inflation to average:
- 2.5% in 2024
- 2.6% in 2025
- 2.3% in 2026
- 2.1% in 2027 and 2028
- 2% in 2029.
As such, you may need to be aware of how inflation could erode the value of your cash savings now and in the future.
Read on to learn more.
The average UK savings account lost £2,718 in real terms between January 2014 and January 2024
Over the past few years, the rate of inflation was often much higher than the average interest rate on a cash savings account. This meant that the cost of goods and services was likely growing faster than your wealth, meaning that the real-terms spending power of your savings may have fallen.
In fact, Finder reports that the average UK savings account lost £2,718 in real terms between January 2014 and January 2024. This is likely because the price of goods and services grew faster than cash savings.
For example, if you had put £1,000 in a savings account with an interest rate of 2% in 2022, you would have had £1,020 a year later.
Yet, if inflation is 11.1% – as it was in October 2022 – the same goods and services that had previously cost £1,000 would cost £1,111. As a result, the spending power of your savings would have fallen.
Of course, inflation is no longer at this high level, but it’s important to remember that the cost of living is not going down, price rises have simply slowed. As a result, inflation could still make it more difficult to achieve meaningful growth in the future.
Fortunately, there are ways to potentially protect your savings.
3 effective ways to protect your savings from inflation
1. Shop around for the best interest rates
To combat high inflation, the BoE increased its base rate – the interest rate it charges to other financial institutions – 14 consecutive times between December 2021 and August 2023. This led to an increase in cash savings interest rates and you may have benefited from this yourself.
However, the BoE reduced the base rate from 5.25% to 5% on 6 August 2024, and again to 4.75% on 7 November 2024. If inflation remains low, the base rate could fall further soon.
Cash savings interest rates are already changing in response to the reduction of the base rate. According to Money, providers cut interest rates on 229 savings accounts in the week following the August 2024 base rate decision.
Interest rates may be less likely to continue coming down until inflation falls below the annual 2% target again.
Despite this, it could still be more difficult to generate growth on your cash savings in the future as interest rates have already fallen. That’s why it’s important to shop around regularly, so you can find the best possible interest rate and potentially maximise growth.
2. Review your emergency fund
Your emergency fund is important as it provides a useful buffer against financial shocks. If you need to make home repairs or replace your car, for example, you may be able to cover those costs without relying on expensive borrowing.
However, you may want to review your emergency fund and limit the amount of wealth you hold in cash, especially if high inflation is eroding the value of your savings.
The general recommendation is that you hold three months’ worth of expenses in your emergency fund. That said, it could be useful to calculate how much you realistically need in your emergency fund and build savings according to your unique circumstances.
If you have surplus funds in your cash savings, you might benefit from holding that wealth elsewhere.
3. Consider investing additional wealth
Investing a portion of your wealth could be more effective than holding all your savings in cash if you want to generate growth that beats inflation.
For instance, MoneySavingExpert reports that the best interest rate on an easy access Cash ISA on 29 October 2024 was 5.12%. However, interest rates have been much lower than this in the past and could fall again in the near future.
In comparison, Curvo reports that the FTSE All World index – an index of mid- and large-cap stocks from around the globe – delivered annual compound growth of 10.12% between September 2003 and January 2024.
As such, if you plan to hold wealth for a period of five years or more, you may benefit from investing rather than leaving funds in a cash savings account (with the exception of your emergency fund). This could mean you’re more likely to see inflation-beating returns.
Get in touch
If you are concerned about the effects of inflation on your wealth, we can help.
Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
