Inflation: this time it’s personal

Much is made about the impact of inflation on the ‘real’ value of your income and investments. That is, the impact inflation has on your ability to continue affording your lifestyle.

The magic number

The Bank of England Monetary Policy Framework has an inflation target of 2%. The remit is not to achieve the lowest possible inflation rate as inflation below the target of 2% is judged to be just as bad as inflation above the target. However, this magic number masks a wide variation in the levels of inflation experienced by different groups of people as it is calculated using a basket of goods and services that’s meant to reflect the spending habits of the ‘average’ household.

Research by the UK Office for National Statistics (ONS) highlights that those who are retired, or who have lower disposable incomes, face significantly higher levels of inflation than the rate used to calculate increases in the state pension and other benefits.

In fact, retirees and students experienced the highest rates of personalised inflation with the difference widening as the rate of inflation increases. For example, in 2003 the official inflation rate was 1.4%, while that of the lowest earners was 1.5%. In 2008 the official inflation rate was 3.6%, but 4.4% for the lowest earners.

The effect of inflation on savings

Inflation is an economic fact of life but this analysis shows that in retirement you are likely to be faced with potentially higher levels of inflation than you’re used to. Whilst the state pension currently features of inflation. Further, if you rely on your personal pension for ‘the little luxuries’ or even to maintain your basic expectations of a comfortable lifestyle, you will not be able to ‘grow’ this income through wage rises or by changing jobs as you may have been used to as an employee.

If the returns you get on your money are unable to at least match inflation, then your assets will effectively lose value each year. Depending on your personal circumstances, you may need an investment strategy with the potential to provide adequate real returns to address these inflationary issues. The road ahead is far from clear, but that’s all the more reason to pay close attention to how your savings are invested.

The value of your investment and any income from it may fall as well as rise. You may not get back the amount you originally invested.

Article correct at time of publication.

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