What inflation is costing you, and what you can do

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Inflation – the general rise in the cost of living – has a big impact on your finances, both immediately and in the long term. Yet what effect does inflation have, exactly, on your wealth and budget? What can you do to mitigate its harmful effects?

Below, our Norwich financial planners explain how inflation can erode a household’s finances and how its negative effects can be counteracted. We hope these insights are useful to you. If you want to discuss your strategy with us, please get in touch to arrange a no-obligation financial consultation:

01603 789966
[email protected]


What effect does inflation have on your finances?

Inflation erodes the “spending power” of your money. Suppose the price of a good rises by 10% over 12 months, taking it from £1 to £1.10. This means you need another 10p to buy the same item. To get the additional 10p, your income (e.g. salary) needs to rise or your wealth needs to have grown – for instance, your cash savings also grow by 10%, or more, in the same period.

However, not everyone has enjoyed a continual rise in their spending power over the years. Indeed, studies show that, for many low-skilled UK workers, “real” wages (earnings adjusted after inflation) have largely stagnated since the 2008-9 Financial Crisis despite years of rising economic growth and employment.

Inflation can be a “silent killer” on an individual’s finances because overall price changes are hard to notice. Can you remember what a pint of milk cost 5 years ago, or a cinema ticket? In recent years, UK prices have risen somewhat slowly – around 2% per year, near the Bank of England’s (BoE) target. However, since late 2021 price rises have become far more noticeable due to soaring inflation. Indeed, in October last year, inflation peaked at 11.1% mainly due to rising wholesale prices for food and energy.


What about my wealth?

High inflation, of course, puts extra strain on your monthly budget. Yet it also undermines the “real growth” of your long-term wealth. For instance, suppose your investment portfolio grows by 5% in a year but inflation also rises by 5% in the same period. On paper, it appears that you have grown your wealth. In real terms, however, your wealth growth has flatlined. This is why investors need to be especially mindful of rising prices and how they can affect their strategies.

Ideally, investors need to try and match – and beat – inflation with their investments over the long term. In the short term, this may be very difficult if prices are rising exponentially (as they have done between late 2021 and 2023). However, if the BoE can bring the UK close to its 2% inflation target, on average, over many years, then beating inflation is more achievable for investors. The challenge, of course, is staying disciplined in maintaining a long-term view as an investor – not getting discouraged or distracted by volatile inflation figures in the short term.


How to address inflation in your financial plan

A good starting point is to examine the role of cash in your financial plan. Recently, in late 2023, a rare turn of events has finally allowed savers to beat inflation with fixed-term accounts. However, normally it is very difficult to find cash accounts with interest rates that even match inflation, let alone beat it. Therefore, cash is typically regarded as a poor asset type for building long-term wealth because its spending power will gradually diminish. Rather, cash is typically better assigned to short-term goals such as building an “emergency fund” or saving up for a first mortgage deposit (to be spent within 3-5 years).

Regarding short-term finances, a monthly budget can be made more robust to withstand inflation if individuals take the time to review their income and expenses. Try to ensure that there is a healthy “gap” between the two in case the latter rises (e.g. if oil prices rise and this increases your weekly petrol costs). Maintaining a regular habit of saving and investing by contributing to a pension will help with this since you are already building the discipline of setting aside extra income towards future goals, rather than towards immediate spending. If your income rises, perhaps due to a promotion, then consider raising your savings and/or pension contributions rather than just your spending.

You cannot control how prices move in the wider economy. This is the realm of politicians and central banks more than ordinary citizens. However, this does not mean that you are powerless when dealing with inflation. With a well-crafted budget and a prudent long-term investment plan, it is possible to navigate changing prices with greater confidence and wisdom. Get in touch to explore how to build a more “inflation-resilient” financial plan with us.



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]