Before the sunshine beckons! / Inflation erosion

12 April 2022

Summers are getting warmer and seem to be arriving faster. With Easter upon us it will not be long before students go back at school or university, and the opportunity for parents and grandparents to kick back and enjoy the garden, balcony or park beckons as the weather gets warmer.

Before you head out into the sunshine, though, in this year more than ever your finances will need to be considered carefully. Sure, we have moved into a new tax year, renewing most annual tax allowances. However, in this blog, I am not referring to these, although they are important. I am of course referring to inflation, and you are likely already to have felt the cost increases at the petrol pumps or in your local food store or supermarket.With the Office for Budget Responsibility indicating that inflation (as measured through the Consumer Prices Index / CPI) will increase to 8.7% by the last quarter of 2022, before holding station and then falling back in 2023, real purchasing power might become ever more relevant as inflation eats away at your income and capital on deposit. Although the Bank of England has increased base interest rates to 0.75%, and with the next base rate decision in May 2022, deposit interest returns have shown much improvement over the last year or more. If you think about it, if you were able to receive 1% interest net pa AER on £100,000, by the end of a year with anticipated inflation running at 8.7%, the real value could go down by over £7,000 in effective purchasing power over a year if this differential was maintained. That's a lot of notional loss for taking no action!

The opportunity to gain improved returns usually occurs by introducing risk through the investment used, although not guaranteed. Capital is then usually at risk, however, with inflation doing its thing, the same effectively occurs with deposit funds because their value is lessened by the effects of inflation. A link to our Investment Risk Scale can be found here to help you consider investment risk a stage further: chaptersfinancial-investmentriskscale.pdf

We have seen the number of new enquiries increase in part because of the rapid rise in inflation, which has muddied the waters for some traditionally risk-averse individuals. In our experience, some have found their ability to accept increased investment risk, or investment charges (or a combination of both) too much to accept. That's a good thing, because it is sensible to at least consider investment options, even if they are to be dismissed. Some clients and enquirers have been keen to invest at the level of investment risk they can accept and tolerate, taking into account any ethical, social, environmental or governance views they hold.

Before you head for the warmth and sunshine of the outdoors (obviously not guaranteed with the English weather!), do take time to think about and check your financial position and its exposure to the effects of inflation now and into the near future. Then seek advice to be able to implement any changes that might work well with the aim of maintaining the real value of your money and income.

No individual advice is provided during the course of this blog.

We hope you have a great Easter.

Keith Churchouse FPFS
Director
CFP Chartered FCSI
Chartered Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899