With inflation at over 6% and forecast to rise to 8% this year, many of us will be wondering what we can do to keep our savings ahead of the game and maintain buying power. Further, unless you lived through the 70s and 80s, this sort of level of inflation will be a totally new experience. Back then, the rate broke into the 20%'s per annum.
If we consider the main liquid assets available, cash, fixed income securities and shares, then there are definitive winners and losers.
Considering cash first, we all need to keep a reserve for planned capital expenditure and to cover contingencies. However, as an investment it never keeps up with inflation. At the time of writing, the best instant access account is offering a rate of 1.5%, with the best three-year fixed rate 2.21%. (Source Moneysavingexpert.com) So, even with the higher rate, the “pound in your pocket” will be worth around 95p by the end of a year. The next question is “what will it be worth when the fixed term ends?” Its buying power could easily be in the mid 80p range.
If we look at fixed income, in the longer term they have given a real return over and above inflation. However, there are periods when this does not happen. There are also many alternatives in this arena including index linked gilts offered by the Government, which fund our debt. The basic premise is that they offer a return over and above inflation on both the capital and income it pays, known as the coupon. However, it is not that simple as they are traded and how profitable they may be is dependent upon many factors.
Equities, or in other words, shares in stock market companies, have a very good record of providing a return over inflation, even when it was very high.
