The Reality of Inflation

It affects everybody, whether it’s your salary or your savings. Inflation silently erodes potentially your income and certainly your savings. The figures in Europe, The UK and America show that core inflation is actually increasing despite governments saying inflation is coming down.

Many believe that governments are downplaying figures. Why?

There are upcoming elections in many countries, and governments use an index to calculate inflation that excludes various items. The reality is that the everyday man on the street can see the prices of all goods increasing. Excluding certain items is not a true reflection of inflation.

As an investor, you should be concerned if your money is in a bank account, potentially making 1% per annum if inflation is around 5%. You are losing money every year.

If you had £100 in your pocket and you lost 5% every year. It would drop to £95 and then £90. You would do something about it because you can see that you are buying less for the same amount each year. This applies not just to your savings but also to your wages. Many are finding ways to increase that, like negotiating better increases that beat inflation.

Unfortunately, Inflation is high, and it’s here to stay. Why?

Deglobalisation is a cyclical trend that happens about every 30 years. Countries have become more nationalistic (focused on national trade and development), and international free trade has dropped, causing higher inflation. For example, the US and China are placing trade tariffs on each other, wars like in the Ukraine and Israel-Hamas are wreaking havoc on economies, and oil prices are constantly being under threat. As long as deglobalisation dominates, inflation will stay high.

If you have savings, it is important to see a financial advisor to ensure that your money is earning returns that beat inflation. You can decide how much risk to take in investing according to your risk preferences. A lower-risk investment could give you your 6% return to beat inflation, or you could invest in a higher-risk investment with more equities to beat inflation and grow your money.

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