After the Bank of England recently announced that it had left interest rates on hold at just 0.1%, it also predicted that the rate of price rises would increase in the near-term and inflation “is projected to rise temporarily” to 4% this winter.

This is the highest rate for a decade and a faster than anticipated increase, heavily attributed to the economy reopening after the easing of coronavirus restrictions. While the central bank previously pledged to not raise rates until its 2 per cent target was reached “sustainably”, this can now no be longer the case. They do, however, predict that rates will peak at 4% and represent a transitory movement – rates are anticipated to gradually drop back down to 1.9% by 2023.

These are still only predictions made within a labour market entirely transformed by COVID-19, Brexit, and subsequent migration restrictions where forecasts must remain exactly that. Increased labour costs, higher goods prices and higher commodity prices may be a temporary shift as the market adjusts or they may be indicative of a more fundamental change. Either way, it still makes good financial sense for individuals and businesses to consider the potential impact of inflation on finances, savings, investments, and profitability.

Protecting your Savings

The combination of rising inflation and low interest rates is not necessarily good news for savers. Unless you have an account that matches inflation, the chances are that the value and buying power of your cash is gradually falling. 

There are two options. You may wish to weather the storm and wait for things to stabilise, which experts predict will happen gradually following the winter inflation rate peak. Or, you could consider alternative savings vehicles to avoid keeping the money in cash.

We would generally advise to steer clear of fixed-income investments as the fixed amount will be worth less, although there may be some exceptions. Look instead to those investments that tend to perform well when prices are rising – commodity-focused choices such as metals and mining or energy are generally in high demand during times of high inflation especially with the general global movement towards low-carbon choices. Investment trusts can also help to beat inflation in the short term.

Working out Wages

Businesses also need to take a step back and consider the landscape. Starting salaries in the UK this past July surged at the fastest pace in at least 24 years. A comprehensive report suggests that inflationary pressure on wages after Britain left the EU has reduced the number of workers and meant employers are hiring from a smaller pool of candidates. Pay rates therefore reflect the increasing competition to fill jobs, fuelled further by the loosening of pandemic restrictions and the market opening back up.

While underlying wage growth rates do not yet suggest that high inflation is here to stay, employers do need to consider that wage and price increases may be persistent as more jobs need to be filled and we cannot rely on an “assumed surge of people” returning to the labour market.

Many workplaces will not have to increase pay in line with inflation but should be conscious that they may face tougher competition with other companies when it comes to candidates choosing between job offers. Employers may also need to consider increasing wages to retain valuable employees and minimise the risk of them seeking alternative opportunities.

In the light of such developments, employers need to think about inflation more than in previous years and be creative in their recruitment processes in order to maximise success and minimise costs. One way to attract the highest calibre of talent and push your business ahead is to offer an attractive employee benefits package. As most employers will likely be offering a range of benefits already, this is a more cost-effective way to attract the right candidates. You can alter your offering to maximise appeal or simply adapt your communications strategy to ensure benefits have a prominent position in your recruitment campaigns.

Inflation in Retirement

If you’re at the stage of life where retirement planning is a main priority, it’s important to be aware that inflation could have a major, and abrupt, impact on your private pension savings. Even at just 2.5 per cent inflation, one pensions specialist says that: “you would lose nearly half of your purchasing power over 25 years if your money is held in cash”.

Protecting your portfolio will look much the same as it will for savers at all levels, as explained above. However, it will have a sharper, more pressing focus as the prospect of retirement looms. It’s all about choosing the right investments and reviewing the level of risk you are willing and able to take at this stage. You should also review the investments that your pensions are in.

Cash assets should be a last resort as they prove little to no real return. Annuities are less popular than they once were but could potentially present a good deal for older people or those suffering poor health.

While it may not be an option for everyone, delaying your retirement or leaving your pension savings untouched for longer than originally expected is one of the best ways to continue to take advantage of tax relief and invest above inflation returns. However, this is a major decision and it is essential to consider all eventualities and discuss your options with a trusted, professional financial adviser.

Healthy Financial Planning

The inflation forecast may seem daunting but it’s just a signal to individuals and businesses alike that it’s time to review your financial arrangements. Regular reviews are an integral part of the service that we offer because this is your opportunity to make sure that your savings, investments, and wider financial planning is in line with key goals. It’s also an effective way to identify and protect against any potential risks, as well as uncover new opportunities for returns. Contact us today to find out more.

Risk Disclaimer:

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. TR Wealth shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.