Inflation Up Again

A thread that has run through our newsletters has been the threat that inflation poses to whatever capital we may have been able to accrue over our lifetime. The latest inflation figures from the Office for National Statistics have re-emphasised how serious a danger inflation now represents.

The Consumer Prices Index (CPI) increased last month from 4.5% to 5.2% per annum. RPI, however, which most would regard as the true measure of inflation, increased from 5.2% to 5.6%.

In simple terms, therefore, your savings have to earn at least 5.6% per annum just to stand still. If you are relying on deposit returns with bank base rate at just 0.5% per annum the value of your accumulated wealth is shrinking at a rate in excess of 5% p.a. Even if you lock your funds away for a year at a time or longer you will be lucky to achieve a return much better than 3% and even if you commit them for 5 years you will be lucky to earn above 4.5%.

Given that conventional deposit investment is currently a guaranteed way of losing money the need for a carefully constructed wealth management strategy is becoming more pressing with every fractional percentage increase in the inflation rate. At the current rate the purchasing power of every pound you have saved will have halved in less than 12 years.

As we have mentioned many times before, there is no risk-free approach to investment. At the moment funds held in conventional bank and building society accounts are becoming increasingly under assault and could only be considered risk-free if you do not consider inflation a risk.

If you are not one of the fortunate few with remuneration and savings linked to RPI you might like to talk to us. There are no guaranteed solutions but at least we can arm you with a plan.

At least ISA contribution allowances have been increased by 5.6% to £11,280 from next April. Every cloud…

21st November 2011