Why inflation is the absolute worst - and how to fight it

User Written by Jordan Donald on November 01, 2018.

Why inflation is the absolute worst - and how to fight it

UK inflation hit a six month high of 2.7% in September, which came as a surprise to many. That’s higher than the ideal – a rate of between 1 and 2% is generally thought to be a sign of a healthy economy - but not as catastrophic as the 25,000% and rising rates that the poor Venezuelans are facing at the moment. That’s hyperinflation on steroids and proves that Ronald Reagan was spot on when he said that ‘Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.’

Of course inflation matters on a macroeconomic level because it affects governments, companies and employees but it also has a huge impact directly on you. Why? Because inflation causes the price of goods and services to rise over time, increasing the cost of living. If your income doesn’t rise at least in line with inflation to compensate for your reduction in purchasing power, your standard of living will take a hit.

Let’s say at the beginning of the year you could fill your car up with petrol for £50. With inflation at 5%, by the end of the year it will cost £52.50 to fill your tank. While that may not seem like much, if every single item you buy rises by the same percentage, you can see how your bank balance will start to suffer.

There are some variations on a theme when it comes to inflation:

Hyperinflation: When the price of good and services rises more than 50% in a month
Stagflation: Double whammy of inflation at the same time as a recession
Asset inflation: When the prices of assets such as gold, stocks or housing rise

And as to the causes of inflation, there are two main culprits. The first is when demand for goods and services outstrips supply. This is known as demand pull inflation. There are many factors which can contribute to this including a booming economy, when people earn more and spend more, pushing prices up, the expectation of inflation which causes people to spend now to avoid future price increases and an expansion of the money supply – via an increase in credit, loans and mortgages or even governments literally printing money - which means that there is too much capital chasing too few goods.

Cost push inflation on the other hand is when demand increases or stays the same but supply is limited. Natural disasters or strikes often trigger cost push inflation as supply lines are disrupted but demand stays the same, pushing prices upwards, often dramatically.

It’s not that much talked about but there is actually a thing called the misery index, which is calculated by adding together the rates of the dual nasty villains of inflation and unemployment to basically tell us what a rubbish time we are collectively having. Anything over 10 means we’re all thoroughly miserable and is often an indicator of rampant recession.

And that thief, inflation, not only has the ability to make you miserable right now but it could also be stealing happiness from your future because of the dramatic impact it can wreak on savings. It’s surprising how many people don’t consider this but if money you have squirreled away is earning less interest than the rate of inflation, it is basically losing value. If you check out the Money Saving Expert site, 2.7% is the highest rate offered but that is for a minimum deposit of £10,000 invested for at least 5 years with Close Brothers (no, me neither!). That means that the vast majority of British bank deposits are losing money.

And you certainly don’t want to be doing that on sums of any size, particularly your retirement savings or your child’s university fund. So how to do fight the dastardly foe that is inflation? The answer lies in investing your money elsewhere. There are many people who make the assumption that the stock market is not for them, envisaging the clichéd stereotype of Gordon Geckos ruthlessly wheeler dealer-ing their way to unimaginable wealth. In fact, the vast majority of stock market investors are individuals just like you or me, trying to get the best out of their savings to secure their financial future once they stop work.

For us, it’s not about timing the markets and judging the ideal moment to buy and sell but all about selecting the best products for our requirements from a whole host of investment options and keeping hold of them for a decent length of time. These unsung superheroes produce returns better than those we can get in the bank and are invaluable in the fight against inflation.

They come in many guises from individual stocks, bonds and securities to off-the-shelf, ready diversified multi-asset portfolios. The choice can be bewildering for the rookie investor but if you’d like to speak to an expert, I can help you win the fight against inflation. Contact me today at Jordan.donald@infinitysolutions.com for a free, no-obligation financial planning consultation email!

Jordan Donald

Jordan Donald

Posted on November 01, 2018 in Investments.