19 July 2023
If you are covering the latest UK CPI figures and the impact on personal finance, please see the following comments from Rosie Hooper, chartered financial planner at Quilter:
“Inflation may have dropped to 7.9% in June after remaining stagnant at 8.7% in April and May, but the dual impact of high inflation and high interest rates continue to squeeze people’s personal finances. The past few months have illustrated just how unpredictable these two forces can be, and with inflation still high and the Bank of England likely to increase interest rates further still, it is vital that people understand their impact on their finances to support their decision making when it comes to mitigating potential damage.
Mortgages and other debt:
“Inflation has eased to 7.9%, but while this is a considerable fall from the double digit figures we had grown used to in previous months, it is still very high and far above the Bank of England’s 2% target.
“Inflation has not fallen at quite the rate that had first been hoped, and the BoE has therefore hiked its base rate to 5% and it is expected to climb higher in a bid to further tame inflation. As a result, borrowing money has become considerably more expensive. High interest rates are making it far more difficult for people to obtain a mortgage or for existing homeowners to refinance their mortgage due to affordability requirements. Those looking for a new deal are faced with the prospect of a major squeeze on their finances at a time when it is already difficult for many to keep up with regular living expenses.
“What’s more, the higher interest payments will also make it much more expensive to borrow money which can cause people to quickly fall into a spiral of debt. Debt management strategies, such as creating a budget, cutting unnecessary expenses, and increasing income through additional work or side hustles, can help individuals stay on top of their debt payments and avoid potential financial strain caused by rising interest rates. For anyone struggling with debt it is crucial not to bury your head in the sand and seek help sooner rather than later.”
Savings:
“Higher interest rates help to grow your savings at a greater rate, but high inflation will erode the value of your savings in real terms. With inflation now sitting at 7.9%, if your bank is only paying a savings interest rate of 5% in line with the BoE’s base rate then you will be making a significant real terms loss of 2.9%. This can make it much more difficult to meet your financial goals such as buying a house or saving for retirement.
“Inflation is not falling at the pace we would hope, so it is important people look to combat its effects. To do so, individuals may need to save more or invest their money in financial vehicles that offer a higher return. The stock market has had a challenging period, but historically investing has provided inflation-beating returns over the longer term.”
Investing:
“At a time when people’s finances are already stretched, they are less likely to have money left each month to put into investing via products such as stocks and shares ISAs. Reducing the amount you put into savings vehicles such as pensions or ISAs can have a considerable impact on how much you end up with in the longer term given the impact of compound interest. Wherever possible, you should try to maintain regular savings into investments. After all, something is better than nothing.
“Additionally, making sure your investments suit your risk appetite is crucial. It may be tempting to try to combat the effects of inflation by opting to invest in riskier assets that might have a higher potential upside, but this could end up being loss-making. It is important to carefully consider your financial goals and risk tolerance before making any investment decisions, particularly during these more challenging times, and seeking professional financial advice could be beneficial to ensure you get the best possible outcome to suit your personal circumstances.”
Pensions:
“Many pensioners tend not to have much debt as they typically own their home outright, but that does not mean they will escape the current financial pressures.
“High inflation means that their regular pension payments may no longer cover their living expenses as they did before. While the state pension was boosted in line with inflation some pension plans may not keep pace with inflation, therefore reducing the value of benefits over time, which could result in a lower standard of living and increased financial stress.
“If someone holds a significant level of cash in their pension, the recent interest rate hikes will help produce higher levels of growth but it will remain a long way from beating inflation. For those still contributing to their pension, high interest rates can also make it more expensive for businesses to borrow money, which can lead to less economic growth, lower profits and ultimately reduced pension contributions.”
