After years of slumber, the inflation dragon is stirring. Are you prepared to meet the challenge?
CPI annual inflation reached 5.4% in 2021. Twelve months earlier the rate was just 0.6%. The sudden return of inflation has surprised many, including the Bank of England. It is now busy raising interest rates. But what should you be doing?
Check your protection
As the graph shows, the mirror image of inflationary price rises is the falling value of money. If you have life cover, critical illness cover or income protection that pays a fixed amount, then inflation is eroding its value to your family. To maintain their protection, you should consider arranging some top up cover.
Review your retirement planning
Inflation means that, all other things being equal, you will need a larger pension pot to fund your desired standard of living in retirement. There is only one way to do that: your pension contributions will need to increase. Even if your contributions are earnings linked, that may not provide a sufficient increase – the latest data show earnings growth lagging behind price inflation.
Beware holding excess cash
The Bank of England is now lifting rates, but there remains a huge gap between deposit and inflation rates. We all need to hold some readily accessible funds, but make sure that you are not holding more than you need as a rainy-day reserve, because it comes at a cost.
Reassess your investment strategy
An investment strategy that has worked well in the era of low inflation and near zero interest rates may not be as appropriate when inflation and interest rates are both rising. An obvious area for review is holdings in fixed interest investments, which suffer when inflation devalues future payments.
Shares do not offer the same level of capital security as cash deposits. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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