Investing to beat inflation for the long-term

At a glance

  • A higher than average inflation rate means that, over time, the purchasing power of your savings may be reduced.
  • Building a diversified investment portfolio can help protect your money against inflation.
  • Over time, equity investments such as stocks and shares tend to provide greater returns than the average rate of inflation, although this may not always be the case.

Even though, at time of writing, the inflation rate, as measured by the Consumer Prices Index (CPI), has reduced significantly from 10.5% in December 2022 to 4% in December 20231, inflation remains a hot topic. This is welcome news for consumers, although prices still remain high and most families are still keeping household spending on a tight rein.

Interest rates and inflation rates can fluctuate dramatically, as we have seen in the past two years. And that can have a very real effect on the spending power of your savings and investments, as well as your day-to-day household expenditure.

Rising inflation means most things cost more. And the knock-on effect of that is that any savings you have won’t buy as much in the future, unless the interest that you are earning on them outstrips the rate of inflation.

For much of 2023, we saw inflation rates that were higher than interest rates. Which means that cash savings or cash ISAs simply couldn’t achieve the necessary growth to match the rising cost of living. By June 2023, food prices were up by 17.3%2.

Even though inflation is now in single digits at 4%, it’s still double the average 2% target set by the government.

According to the Bank of England, it remains difficult to predict how interest rates will respond3. The latest Monetary Policy report says rates are expected to remain around 5.25% until autumn 2024 and then decline gradually to 4.25% by the end of 2026.

So it’s a wise idea to check your current interest rates on any Cash ISAs or savings accounts, to see how they measure up against inflation, whenever new monthly figures are released. And while it’s always encouraging to see a higher than average interest rate, without wanting to rain on the parade, savers have to be careful to make sure their savings income doesn’t exceed their personal savings allowance: £1,000 for basic rate tax payers and £500 for higher rate tax payers or the starting rate for savings should they quality for it. There’s no personal savings allowance for additional rate tax payers.

If inflation rates rise again, will a bank account protect my savings?

When it comes to beating inflation, relying solely on your high street bank savings isn’t always the best strategy.

While banks do pay interest on instant access savings and Cash ISAs, the typical high street rates don’t always outpace, or even keep pace with, inflation. As we’ve seen, this means that the purchasing power of your savings slowly declines.

If there’s a gap between the Consumer Price Index or inflation rate, and the base interest rate, it’s quite hard to find savings providers that will offer returns above the rate of inflation.

How long-term investing can help you beat inflation

If you’re planning on saving over the long term, then investing could be a better way to shield your money from inflation.

The key to beating inflation is by investing in assets which produce a higher rate of return than interest rates. Over the long term, that tends to be equities – stocks and shares. They have the ability to outpace inflation, although that doesn’t always guarantee that they will.

You should be aware, however, that investing does come with a certain degree of risk. An adviser will always discuss what level of risk you feel comfortable with, and help you choose a diverse portfolio that’s appropriate for you, and your long-term financial goals.

Don’t put all your eggs in one basket

Spreading your investments across different types of assets – such as equities, bonds or property – is also a good way to diversify and strengthen your portfolio.

Different assets may perform differently under different economic conditions. No single type of asset will be the best performing one forever – so by keeping a diversified portfolio, you can help make your investments more resilient. Whatever inflation and interest rates are doing.

Please be aware past performance is not indicative of future performance.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

Equities do not provide the security of capital which is characteristic of a deposit with a bank or building society.

1Office for National Statistics – 17 January 2024 
2Food Foundation Food Prices tracker – 18 July 2023
3Bank of England – 2 November 2023 

SJP Approved 19/01/2024


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