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How “sticky inflation” could affect your finances in 2024

Even the most robust financial plans are vulnerable to forces outside of your control.

Inflation, interest rates, unemployment, low or negative growth, and other macroeconomic variables can all affect your finances and impede your progress towards achieving your financial goals.

Whilst it may not be possible to personally influence any of these factors, anticipating and preparing for them, where possible, could be a good strategy to help mitigate their potential effects.

Data from the Office for National Statistics (ONS) shows that UK inflation rose sharply between early 2021 and October 2022. Though inflation has come down steadily since then, the latest figures show it is still above the Bank of England’s (BoE) target rate of 2%.

This is known as "sticky inflation" whereby inflation stubbornly remains above optimal levels for longer than consumers had anticipated. UK inflation could be described in this way today, as, despite recent progress, it remains in excess of the BoE’s target.

Inflation fell substantially in 2023 but remains above the 2% target as of February 2024

In October 2022, UK inflation rates reached 11.1%, the highest in over 40 years.

Several factors were behind this, with the three primary ones being the aftermath of Covid-19, significant employment shortages, and the Russian invasion of Ukraine.

In response, after around 14 years of low interest rates, the BoE raised the base rate to help combat the rising prices that led to the UK’s soaring inflation rate. It steadily lifted the base rate from 0.1% in December 2021, eventually bringing it to 5.25% by August 2023 (where it still stands as of March 2024) – the highest base rate in more than 15 years.

Data from the ONS shows that the BoE’s strategy was somewhat successful. By November 2023, inflation was down to 3.9%. However, it then rose again to 4% in December and stuck at the same level in January, despite the BoE fixing the base rate at 5.25% in an attempt to reduce inflation further.

The most recent figures, published in March 2024, show that inflation fell from 4% to 3.4% between January and February. This is welcome news, but inflation is still above the BoE’s target rate of 2% – and after its incremental increase in December, the road to an overall decrease may not be smooth.

3 aspects of your wealth that could be affected by sticky inflation

Although inflation is now significantly lower than it was in 2022, the rate of inflation is still sticking above the target rate of 2%.

It is important to remember that lower inflation does not mean prices are falling, but rather that they are increasing at a slower rate. Even if inflation does reach 2% and remains there over the long term, it could still have a detrimental effect on your finances in the years to come.

So, what effect could persistent inflation have on your finances? Let’s take a look at three key factors.

1. Your cash savings

Sticky inflation can erode your savings, which may then affect how much you will be able to afford in the future – your “purchasing power”.

While you may earn interest on your savings, cash performance can struggle to outpace inflation in the long run.

Indeed, data from the BoE inflation calculator shows that if you had £100,000 in cash savings in 2014, it would need to deliver nearly £33,000 in returns to maintain the same purchasing power in February 2024.

Considering that the base rate was set between 0.1% and 0.75% for most of that decade, it is unlikely that you would have seen such returns on your cash savings.

Although some interest rates for savings accounts are relatively high as of March 2024, around 5%, if the BoE reduces the base rate, banks and building societies may follow suit, and returns on your cash savings could also fall.

A good way to mitigate the impact of sticky inflation on your savings could be to make long-term investments in a diverse range of assets.

IG reports that since 1984, the average return for investments in the FTSE 100 is 6.8%, and that UK stocks have made average annual returns of 4.9% above inflation for the past 119 years.

Meanwhile, Trading Economics reports that the average inflation rate in the UK between 1989 and 2024 is 2.83%.

As you can see, while the market and the wider macroeconomic situation may experience fluctuations, long-term investments could provide higher overall returns than average inflation rates over the same period. This might help your real-terms purchasing power to outpace inflation.

So, opting for a diverse portfolio of assets centred around long-term investments may present a more effective strategy for mitigating the effects of inflation compared to keeping all of your savings in cash accounts.

2.  Your retirement income

Inflation will have a significant impact on your retirement income.

So, it could be beneficial to factor in inflation when making your retirement plans or managing your pension withdrawals, particularly in preparation for periods of high or sticky inflation.

The Telegraph reports that in 2024, a single person who owns their home would need £43,000 a year to enjoy a “comfortable” retirement.

Data from the BoE inflation calculator shows that £43,000 today would only have “cost” around £32,000 in 2014. So, in another 10 years’ time, you may need even more to match the same standard of retirement living that you enjoy today.

The loss of purchasing power over time may mean you have to increase your pension savings to align with inflation or develop a strategy to minimise its effects on your retirement fund.

Again, diversifying a portion of your retirement fund across a wide range of assets could serve as an effective strategy to mitigate the effects of sticky inflation on your pension.

So, whether you are planning for later life or are already retired, accounting for inflation in your retirement plan could be crucial for achieving the lifestyle you want.

3.Your day-to-day expenditure

Sticky inflation can reduce your purchasing power over time and increase your overall cost of living.

Remember: “lower” inflation rates don’t mean that prices are going down, just that they are rising at a slower pace. The prices that rose by more than 11% in 2022 are still rising!

Persistently high inflation can lead to an increase in your overall expenditure, which can limit your capacity to save for other things that may be more meaningful to you.

As prices continue to rise, a realistic budget can be a useful way of ensuring your expenses stay within your means. Budgeting could also help you to avoid sacrificing elements of your financial plan, such as your tax-efficient pension contributions, just to keep up with the cost of living.

Get in touch

A financial planner can work with you to create a plan that puts you on track to achieve your goals and protect your finances even against high or sticky inflation rates.

To speak with a financial planner, get in touch.

Email or call us on 0208 882 2979 for more information.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) 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.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.


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