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Long term impact of inflation: what it can do to your money

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Peter McGahan

YOU will all have seen the rise in inflation and what that has meant for the potential for interest rate rises.

Those most hurt right now are savers. With inflation running at 5.1 per cent and some of the best fixed rate savings at just over 2 per cent, the average saver would be losing around 3 per cent per year and that is excluding tax.

The Bank of England (BOE) has been under pressure to increase rates and take back a little of what they gave during the lockdown period.

In early December, they came under pressure from the International Monetary fund (IMF) to act. The Bank of England's view was that supply issues, caused by both Brexit and Covid, as well as Covid issues in manufacturers, might be able to be looked through, so they had been stalling on rates, but when inflation hit 5.1 per cent on the December 14 that pressure became even more heated. Two days later the Bank increased its rate from its historic low of 0.1 per cent to 0.25 per cent.

To give you an idea of what inflation can do to your money, and why you should do something about it, let's show the impact over the long term.

In 1970, a purchase then of an item for just £5 would cost £79.10 today, nearly 16 times the 1970 amount.

If you had a £60,000 investment product then and the adviser/investment company returned you less than £949,165 today, you would have lost buying power. Quite staggering really.

Amazingly, inflation averaged 5.7 per cent per year over those 50 years.

And so, inflation proofing our money is essential, particularly in today's very unknown markets. If you don't beat inflation, your money cannot buy what it could the year before, and, if you spend, that becomes an exponential drag on your capital, in other words, it begins to erode.

Inflation is currently more than 2.5 times the inflation target the Bank of England is supposed to hit/stick to.

A big threat relates to a strong labour market growth which can increase further upward inflationary and wage pressure. On the potential upside and dampening inflationary growth, is the impact of new variants and what exactly they mean to the economy as a whole.

Will people stop going out spending/socialising and put downward pressure on costs or will shops/bars just keep prices high for those going out and recoup their losses?

The Bank of England thought the latest rise would hit 4.5 per cent but hitting 5.1 per cent this quickly is alarming. The current belief is that inflation will rise to 5.5 per cent by April next year and take until 2024 to calm to the Bank of England target.

Supply chain interruptions (simply getting products and parts into the country) and petrol prices are key to that as they are the biggest driver. Then, of course, a large chunk of petrol prices is government taxes, so easing those could be a plan? The percentage of fuel price which is taxation is actually 56.33 per cent. The IMF has advised the Bank of England to act immediately.

Oil has risen in price and fed through to petrol (suits them now), but you may remember my article in August 2020 where I showed that with oil at $0 per barrel, prices remained stubbornly high. They can't have their cake and eat it with pricing.

Those with savings rates should wait before fixing and those with mortgages may well consider locking in for a rate for the next few years to protect themselves.

I've seen Kensington mortgage launch a 40 year fixed rate of 3.34 per cent and other shorter term rates of 2.83 per cent for 15 years.

Personally I'd take advice on that, as fixing for such a long term has issues, and when all supply issues coupled with Brexit are alleviated, coupled with greater use of electric cars, inflationary pressures should ease.

We don't want any variant causing log jams in factories in China/elsewhere as that will set back supplies and increase prices again.

If you are worried about the costs soaring, do not gamble and instead lock in a rate that ensures you can feed your family and survive. The coming months will be vital to see the impact on inflation but it may be April before that is known.

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have any financial query, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net

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