How Inflation Erodes Savings – And What You Can Do

While some economists believe that inflation may have peaked in the UK, the annual rate still jumped to 11.1% in October 2022. This figure increased from 10.7% in September, while it was also markedly higher than the market forecasts of 10.7%.

This is also the highest rate of inflation since October 1982, while many have forecast that this value won’t decline markedly until some point in 2024.

But what impact does inflation have on household finances, and what steps can you take to combat these effectively?

The Impact of Inflation on the Value of Money and Savings

Inflation is largely synonymous with the erosion of currency value, as it gradually depreciates the purchasing power associated with the pound and similar currencies.

However, this process also effects the real-time value of your savings, meaning that any cash holdings that you hold will be considerably less valuable than they would be in a normal economic climate.

Interestingly, central banks (like the Bank of England) often look to combat rampant inflation by hiking interest rates, with the BoE having lifted the base rate in the UK from 0.10% to 3% since December 2021.

However, while this may incentivise you to save cash as opposed to spending, you should note that the cash value of your savings will be directly impacted by inflation.

How to Beat Inflation and Save Better

The question that remains, of course, is how can you beat inflation and boost your savings over time? Here are some considerations to keep in mind:

  • #1. Shop Around for the Best Interest Rate: If you are going to commit cash to a savings account, you’ll first need to ensure you’re accessing the very best market rate. This will require you to shop around and compare prices in real-time, as identifying the best ensures that you’re achieving the optimal value for your hard-earned money.
  • #3. Shift Your Long-term Savings into Equities: This is another key consideration, as if you’re fortunate enough to hold longer-term savings, now may be the ideal time to shift these into equities. These can be value or dividend stocks depending on the value of your cash holdings or appetite for risk, but the key is that you transfer long-term savings into assets that can deliver a far greater yield while inflation continues to soar.
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