Do you remember the good old days, when you could buy a whole bag of sweets for less than 10p? Yet now, a pic ‘n’ mix in the cinema is nearly as much as the ticket to see the film! Why? The simple explanation is inflation.  

Over the years, our favourite penny sweets have disappeared, replaced by something that looks half the size for more than twice the price.

If you are of that age, now is the perfect time to start considering how the anticipated rise in inflation is likely to impact your family, job, and spending patterns.

And it’s also the perfect time to review your financial situation, to make sure your financial planning remains on track – for now and in years to come.  

Here, we are going to look at inflation in easy-to-understand terms, and how we can help you prepare for what is anticipated.

What is inflation?

Inflation is the amount that prices for goods and services rises by over a period of time. Think back to those penny sweets again!

The higher the inflation, the lower the purchasing power, or number of goods that can be bought for the same amount of money. Quite simply, inflation increases the cost of living.

It is measured in various ways, including the Consumer Price Index (CPI), Producer Price Inflation and the House Price Index (HPI). The CPI is the most quoted and is measured as an average of the ‘basket’ of goods - such as day-to-day purchases, household goods, transport costs and services.

Some see inflation as the sign of a struggling economy, whereas others see it as an indication of an economy which is prospering.

Either way, it is a factor the Bank of England considers for setting the base rate of interest. And of course, this then affects the rate we are charged for borrowing money, and the rate we are paid on savings.

The Office for National Statistics reported that the pandemic caused the Bank to reduce interest rates to an all-time low of 0.1% in March 2020, in a bid to support the economy and encourage spending where possible.

However, it has risen again to 0.7% since, and is likely to continue to increase as we come out of lockdown – with social and recreational spending increasing and spending patterns gradually returning to a pre-pandemic comparison.

How will a rise in inflation affect me and my family?

We are unlikely to see the full picture with regards to inflation until all COVID restrictions are lifted. However, with the increased momentum of the vaccination roll out, and as we gradually start to come out of the pandemic, inflation is expected to rise back up to the Bank of England’s target rate of 2% by May this year. This is partially driven by the price increases already set.

This includes the very much discussed and debated rise in gas and electricity bills, capped at 9.2% and Council Tax increases of up to 5%.

But it is important to remember that inflation is an average, based on the specific ‘basket’ of products.

We are going to look at a few of the ways in which you will be impacted. How it affects different households is dependent on individual situations and circumstances.

Which is why expert financial planning at this time is so important, particularly following the instability of the pandemic, and uncertainty as we come back out of the effects.

Borrowers

We have already mentioned that inflation is not always considered a bad thing. It can be a benefit for borrowers - for instance, a fixed rate mortgage - as it effectively reduces the debt.

The falling interest rate has been positive for any financial borrowing, but you should be mindful that this low interest level may not last for too much longer.

Savings Accounts

Conversely though, a rise in inflation will affect how savings will be valued in future. So, retirement planning and a thorough financial review may be advisable now.

Whilst we are not in control of inflation, and cannot impact it directly, we can at least help you prepare for any adjustments which might be needed to keep your plans on track.

For instance, if the anticipated inflation increase overtakes the interest rates, in real terms cash savings could fall into a negative position. Another reason for a complete review of your finances, and looking for possible alternatives, to keep you ahead of the expected changes.

Pensions

The State Pension is one area which will be relatively secure, as it is guaranteed to increase at either the rate of inflation, average earnings, or 2.5% (whichever is higher). The maximum payment will be increasing to £122 per week from April 2022.

However, pensions which are not linked to inflation could effectively start to devalue. The cost of living will increase along with the rise in inflation, but the pension received may not keep up with that increase, so those retirees will start to feel the pinch.

Wages

To account for an increase in the cost of living as inflation rises, companies may also need to consider wage negotiations for their staff to keep up, and simply keep the economy flowing.

On the opposite side, it could deter commercial investment, and therefore economic growth, due to the accompanying uncertainty.

Those receiving benefits will start to feel more of a struggle, as their payments are set, and will fail to keep up with the cost of living.

New parents though, will see a small difference in maternity and paternity payments, as these are inflation-linked, so will increase proportionately.

Your weekly shop

As we know, many goods and services purchased in the UK are imported, and as the value of the pound falls, you will notice you are spending more on your weekly grocery shopping. The cost of services will increase. Fuel prices will rise again. And this is when stock piling happens, as we want to buy items at their lowest cost, in readiness for price increases.

Subsequently, as demand increases so will the prices rise further. And so, it goes on.

How Simpson Financial Services can help you prepare for inflation

There is evidence suggesting that inflation can reduce unemployment under normal circumstances. However, unemployment is likely to increase when the furlough scheme comes to an end in April this year.

You may be in a position where unemployment itself will not personally or directly impact you. However, it is something that will spread throughout the economy and will eventually affect you in some way.

Whether you are planning for your retirement, looking to invest, already have savings, or would like to review your mortgage, our Independent Advisers are ready to review your current financial situation.

Whilst the full impact of the past 12 months may not be realised for some time, inflation is guaranteed. And we highly recommend seeking our expert guidance to ensure you are prepared. Contact us today to make sure your plans stay on track, and your future is financially secured.