Inflation – so, what is it?

In a nut shell inflation is the rate at which prices for goods and services increase, so not wholly popular however, it does have its benefits for some.

It is measured by the Office for National Statistics (ONS). There are three main estimates of inflation, Consumer Price Index (CPI), Consumer Price Index including owner occupiers housing costs (CPIH) and Retail Prices Index (RPI).

CPI is most commonly used and considers thousands of regularly bought items. However, the ONS prefers to use CPIH as this includes costs of living in your home such as council tax.

Inflation is expressed as a percentage that has risen or fallen over time. If for example, we are told that the rate of inflation for buying a certain product such as fuel is 2% then this is saying that the cost of that item has increased by 2% in the last 12 months.

This does effect what you can buy for your money. If inflation is high, then you simply don’t get as much for your money as you did. However, a little inflation can be good as it will tend to encourage people to buy products sooner and encourages wage increases.

Wages need to keep pace with inflation if you are able to maintain your standard of living and the same is of course true for pension income.

Certain pensions will rise in line with CPI such as the state pension. This is currently governed by the triple-lock that says it will rise by the highest of CPI, average earnings or 2.5%.

One benefit for borrowers is that the Bank of England considers this rate when setting the base rate. If the rate is likely to be below 2% it may cut interest rates to encourage spending, great for borrowers.

So, inflation is not bad for all but, when you hold savings and investments it is crucial that you are holding those funds in a way that they have the potential to grow above the rates of inflation. If they don’t the real buying power of that money is reducing even though the balance may be increasing a little each year.

If it is your intention to hold money for a number of years in savings vehicles such as pensions, then you need to keep a close eye on the real return, taking into account performance and charges. This best achieved with professional financial advice and needs to be monitored on an ongoing basis.

If you feel that you are holding funds for the longer term and are unsure if this has been invested in the most appropriate way, then please contact me for a financial review.

This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned about the content hereof and any such action or inaction. Professional advice is necessary for every case.

Kristina Bailey Dip FA CeMAP