When it comes to talking about inflation, we often look at the headline numbers and the immediate impact, but considerations as to the longer-term effects aren’t always considered.

In our last blog about inflation, we looked at how inflation presented and how it manifested.  In recent years, inflation became very, very steep, and took a long time to get under control.  But what does this mean in real terms and the longer term?

Using sausage as an example:

In 2020, we’re paying £5 for sausages.

In 2026, I’m paying £6.50 for the same sausages.

In real terms it means we can buy less with the same money over a comparatively short time frame.

What this is telling us is that if we look at Consumer Price Inflation (CPI) between now and 2020, the cost of everything has gone up buy over 25%.

If we put this same information next to a proxy for cash deposits and the return that we get from our cash, what we’re seeing is that the return on cash is less than inflation. Meaning what we can buy with our money is less.

CPI over this period is up 27.7%.

Return on my proxy for cash is 15.3%.

In this example, I would be able to buy 12.4% less with my money.

That’s a relatively short five-year period. If you roll this out over a longer period, the problem starts to look even more of a challenge. What this is showing us is if I went to the supermarket at the end of 1999 and I spent £100 on my goods and services, and I then came back this year to buy the same goods and services, I would need £192.10. An extra £92.10 to buy the same goods and services over this time frame.

Going back to our example here, consumer price inflation up 92.1%, cash a 59.9% return. I am down 32.2%.

If I leave my money all in cash, I’ve lost a third of my wealth.

The point here is are you asking yourself:

• Am I protected against inflation?
• Is it reflected in my financial plan?
• Has my financial plan been updated to take into account this unexpected inflation?
• Is my portfolio orientated to counter this threat?
• What changes am I making in my portfolio?

Get with your adviser, take their feedback, make some changes.

Taylormade Financial Management is a long established Independent Financial Advisory practice and well equipped to help clients chart the turbulent waters that surround budget announcements.  Our mission is to provide first-class financial planning advice to individuals, companies and trustees.

Important Disclosure: content provided does not consider individual circumstances and does not constitute personal advice.  The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.