UK inflation set to hit 11%: Stop the erosion of your savings


The cost of living is set to remain consistently high in 2022, with the Bank of England forecasting that inflation, as measured by the Consumer Prices Index, will peak at 11% in October, and remain above 10% over the following few months. This is well above the Bank’s target rate of 2%.

Although interest rates have risen in recent months, many savers are finding that their real returns are being undercut by high inflation. The interest on cash held in banks is your nominal or gross interest. When you deduct inflation, you arrive at the real return. The result may be even worse if your savings income is subject to income tax, as the example below illustrates.

Over time, the impact can be even more dramatic. The table below shows that the real value of your savings would shrink by nearly 30% over 20 years, were inflation to run at 2% annually, which is in line with the Bank of England’s current target.

Historically, consumers have favoured cash ISA subscriptions over stocks and shares ISAs (see chart below). A typical investment ISA mainly invests in a combination of equity, property, and fixed-interest assets.

A diversified portfolio via a stocks and shares ISA can often offer better returns than cash ISAs and will typically grow faster than inflation over the long term. Investing requires a long-term investment horizon, and you should be prepared to live with the ups and downs of financial markets if adopting such a strategy. In good years you can reap substantial gains, but there will also be lean years when investments may decline.

You may be able to beat inflation with the right investments. Speak to a Lumin expert about growing your real wealth on 03300 564 446, or get in touch via our contact form.