How to tackle inflation with a financial plan

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UK inflation (the average cost of goods and services) started to rise dramatically in mid-late 2021. For many years, it had hovered just above the Bank of England’s target of 2%. Yet by October 2022, it had reached a high of 11.10%, putting great pressure on household budgets.

Inflation has come down somewhat in 2023 yet remains a stubborn problem for the central bank. Below, we explain how inflation can affect your financial plan and offer ideas on how to counter its most harmful effects on your finances.

We hope these insights are useful to you. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation:

01603 789966
[email protected]


What is inflation?

The costs of items in shops, supermarkets and online stores do not stand still. Over time, they tend to rise and this is called inflation. The Bank of England (BoE) regards a little bit of inflation as good, since it signifies a degree of growth in the economy.

Indeed, the BoE is keen to avoid the reverse scenario – deflation. This shows falling prices across the economy. Whilst this may sound like good news, it means that fewer people tend to spend (since they are waiting for prices to fall further). This, in turn, leads to negative growth.

On the opposite extreme, however, excessive inflation can also be harmful. If prices rise too quickly, then goods and services may become unaffordable to consumers. This can also lead to lower spending in the economy, thus constraining growth.


Why has UK inflation been rising?

A range of factors explain the UK’s rising inflation rate since 2021. One commonly cited reason is that the UK economy experienced a surge of consumer spending following months of lockdown during the COVID-19 pandemic.

More people were commuting to work rather than working from home, for example, which helped to drive up energy prices. However, Russia’s invasion of Ukraine in early 2022 added further inflationary pressure as sanctions were placed on the former (a major producer of oil to global markets) and the latter’s agricultural exports were hit, leading to higher food prices.

More recently in 2023, prices have started to fall due to variables such as lower food prices. Yet inflation remains stubbornly high at 6.7%. Time will tell whether the BoE can achieve its goal of returning the country to 2% by the first half of 2025.


How inflation affects you – and what to do about it

Inflation directly affects UK households, of course, by making lots of goods and services more expensive. This, in turn, can reduce individuals’ purchasing power – possibly leading them to make cutbacks on their monthly expenses.

Yet inflation also has an indirect effect on your financial plan. The BoE tries to control inflation via interest rates. When inflation rises, the base rate (central bank interest rate) can also go up as authorities try to “cool down” the economy. When the BoE rises, however, so do the interest rates of other banks and building societies.

Since late 2021, the BoE has raised interest rates 14 times – from a record low of 0.10% before the pandemic to 5.25% today, in October 2023. This has had wide knock-on effects on the wider UK economy, including higher savings rates (on the positive side) to higher borrowing costs for businesses and mortgage holders (on the negative side).

This dynamic helps to highlight an important reason for keeping costly debt (e.g. credit cards and personal loans) to a minimum. Yet it also focuses attention on why financial advisers often recommend conducting your own “stress tests” on mortgage affordability. Whilst you may be able to afford the monthly payments on the property now, could you continue to do so in the future if interest rates went up?

Unfortunately, many mortgage holders have been caught out by rising interest rates over the last two years. As their fixed-rate deals come to an end, many people are facing a more expensive mortgage market. Back in December 2021, a £500,000 tracker mortgage (with 20 years remaining) cost £2,356 a month. At a 6% rate today, however, it could cost £3,583 a month – over £1,200 more.

Hopefully, interest rates will fall over the next few years (if the BoE is correct). Those coming up to the end of their fixed-term deal in 2023 may wish to seek professional advice about the best next steps. For instance, should you fix again for a short period or move to a variable rate (in the hope that rates may come down)?

Investors should also be mindful of the effects of inflation on their portfolios. Inflation can apply downward pressure on equities as companies struggle to generate profits due to higher input costs and lower consumer spending (leading to fewer sales). It can be harmful to bonds since inflation erodes the value of future fixed-rate returns.

However, the key to successful investing is to keep focused on the long term and to spend time in the market. Be careful about trying to “time the market” based on predictions about inflation movements. Speak with a financial adviser to build a robust portfolio suited to your needs.



If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01603 789966
[email protected]