Understanding inflation is an important factor when it comes to investing and your financial success. If you don\u2019t factor inflation in when deciding where to put your money \u2013 whether that\u2019s savings accounts or investing \u2013 you could find your wealth shrinks over the years.<\/p>\n
As the post-pandemic recovery takes hold, prices of various goods and services are rising. The recent causes of higher inflation that we\u2019ve been experiencing are largely COVID-related. The easing of lockdowns has boosted consumer confidence and unleashed pent-up demand. At the same time, bottlenecks in production and distribution are squeezing supplies \u2013 from building materials to foodstuffs. This supply and demand imbalance has forced up some prices.<\/p>\n
Before the pandemic, UK Consumer Prices Index (CPI) inflation rate was around 2% – the rate the Bank of England aims for. However, as with everything else, COVID has played havoc with headline inflation figures. For most of the last year, prices have been rising at a rate of less than 1% a year. However, in June inflation rose to 2.5% (CPI).<\/p>\n
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GROWING REALISATION<\/strong><\/p>\n A sustained period of low inflation may have blunted some people\u2019s concerns about inflation. But there\u2019s now a growing realisation that high inflation could be around the corner, which reduces your purchasing power and what you could buy with your savings over time.<\/p>\n Some investors and savers may underestimate the damaging effects of inflation on their wealth. Keeping money in the bank typically earns interest, but if the interest rate is lower than inflation, money or purchasing power is effectively being lost.<\/p>\n <\/p>\n PENSION SAVERS<\/strong><\/p>\n People on fixed incomes \u2013 such as those whose pensions aren\u2019t inflation-linked or workers on a static wage \u2013 are especially vulnerable to the effects of inflation. As living costs rise, your money doesn\u2019t go so far.<\/p>\n Pension savers need to think about what their savings might be worth during retirement \u2013 often a long time into the future. Inflation can make the difference between an enjoyable retirement and a frugal, worrisome one.<\/p>\n <\/p>\n ABOVE-INFLATION RETURNS<\/strong><\/p>\n That\u2019s why you should consider mitigating the effects of inflation by investing at least some of your money in assets that aim to offer above-inflation returns.<\/p>\n Arguably, we can expect inflation to settle back to lower levels once the post-pandemic surge in demand has been sated and supply chains are smoothed out. But even so, with the global economy poised for a strong rebound, most central banks are keen to get back to \u2018normal\u2019 monetary conditions. So rock-bottom interest rates can\u2019t last forever.<\/p>\n <\/p>\n GOOD INVESTMENT<\/strong><\/p>\n Bonds and other assets that pay a fixed income and\/or a fixed investment return are especially vulnerable to inflation. Bonds become less valuable as inflation and interest rates rise, reflected in falling bond prices and rising yields.<\/p>\n Conversely, shares are generally a good investment during periods of modest inflation. A company\u2019s fortunes typically track consumer demand and economic growth. If demand is strong, companies can raise prices, boosting the profits from which they pay dividends to their share-holders.<\/p>\n <\/p>\n