24 May 2023
If you are covering the latest CPI figures, and how it impacts personal finances, please see the following comment from Rosie Hooper, chartered financial planner at Quilter:
"While inflation finally appears to be heading in the right direction and interest rates are nearing the peak, the dual impact of high inflation and high interest rates continue to have a devastating impact on everyone’s personal finances. Understanding how these two economic forces impact your finances can help you make informed decisions to mitigate their damaging impact.
"Here are some of the ways that high inflation and high interest rates impact different areas of personal finance:
Mortgages and other debt:
"While inflation has finally fallen below double-digits to 8.7%, this is still high and way above the 2% target. People's buying power continues to be squeezed, meaning it might be more difficult to keep up with regular living expenses and still have money left over for mortgage payments or paying off other debts.
"To make matters worse, in a bid to tame inflation, interest rates are now much higher than what people are used to, making borrowing money more expensive. This can make it more difficult for individuals to obtain a mortgage or for existing homeowners to refinance their mortgage, especially if they haven't fixed for a long period of time. The higher interest payments will also make it much more expensive to borrow money and can cause people to quickly fall into a spiral of debt."
Savings:
"High inflation erodes the value of savings over time in real terms, while higher interest rates help to grow your savings at a greater rate. However, if for example inflation is around 10% but your bank is only paying a savings interest rate of 5%, then you are essentially losing half of your money. This can make it more difficult to meet financial goals, such as buying a home or saving for retirement.
"To combat the effects of inflation, individuals may need to save more or invest their money in financial vehicles that provide a higher return. Although the stock market has had a difficult period, historically, investing has provided inflation-beating returns over the long term."
Pensions:
"While many pensioners don't have much debt to speak of as they typically own their house outright, high inflation means that their regular pension payments may not cover their living expenses as they did before. Although the state pension has increased in line with inflation, some pension plans may not keep pace with inflation, reducing the value of benefits over time. This can result in a lower standard of living and increased financial stress.
"If someone holds a significant amount of cash in their pension, then the interest rate hikes will help produce higher levels of growth, but the rates will not beat inflation. For workers still contributing to their pension, high interest rates can also make it more expensive for businesses to borrow money, which can result in less economic growth, lower profits, and reduced contributions to pension plans."
Investing:
"Due to the cost-of-living crisis, people may have less each month to put into investing via products such as stocks and shares ISAs. Reducing the amount you put into savings vehicles like pensions or ISAs can have a significant impact on how much you end up with, particularly over a long period of time due to the impact of compound interest. It is worthwhile to try to maintain regular savings into investments where possible.
"Making sure your investments suit your risk appetite is key. Some people may try to combat the effects of inflation by investing in riskier assets that might have a higher potential upside, but could also end up being loss-making. Especially in these economic conditions, it is important for people to carefully consider their financial goals and risk tolerance before making any investment decisions. However, it's worth remembering that although bonds are often seen as lower-risk investments, due to high interest rates, bonds have made significant losses recently. Doing your research or getting financial advice can be crucial to ensure you get the best possible outcome."
