Inflation has been a buzzword on everyone's lips for a while now, with it reaching a 41-year-high in October 2022 and us all feeling the effects of pricier groceries, household bills, and other increased costs across the board.
But if you're still confused about how inflation works, here are some things you should know about it.
Inflation is making everything more expensive
If you manage a budget, you’ll be all too aware that the cost of things tends to go up over time (especially over the past year). That’s inflation for you – how much the price of goods and services have increased since the previous year.
There are many contributing factors to inflation, but a key one is that the price of the things we buy tend to go up because the cost of making and delivering them also goes up. Just think of it this way – wages, raw materials and energy all contribute to increasing manufacturing costs which are passed on to consumers.
Even services like insurance can contribute to inflation as the cost of premiums often rise.
It’s reported year-on-year
Inflation measures how quickly prices are rising from one year to the next, so inflation figures are always presented as an annual percentage change. As an example, if inflation is at 3%, it means that on average things are about 3% more expensive than they were at the same time last year.
You might not notice such small changes from one year to the next, but over time they add up.
There are two official inflation figures
Somewhat confusingly, there are two official inflation figures; the Consumer Price Index (CPI) and the Retail Price Index (RPI), which are both worked out by totting up the prices of an imaginary basket of goods and services that us consumers typically spend our money on. This includes things like food and clothes, but also cars, travel, and even debt.
The only significant difference between CPI and RPI is that the latter includes mortgage interest payments. The one everyone tends to use for the ‘official’ (or headline) rate of inflation is the CPI.
It’s somewhat unpredictable
From mid-2016, inflation was making steady but significant upward movements, leading to predictions that it could reach 4% or higher. But as recent years have shown, it can quickly rise, with it reaching a new record last year and remaining high at 10.1% in March 2023.
It affects the value of your savings
If your current savings rate is below the level of inflation, your cash savings are slowly losing value in real terms, reducing their ‘spending power’ over time. Basically, if inflation is running at a level of 3% and you had £100 saved, it will be worth 3% less in 12 months’ time (so it would be more like having £97). Check out our blog if you'd like to find out more about how inflation can affect your savings.
Investing could be an option if you want to give your money more potential as any returns you make won't be tied to fixed interest rates. This means your money could grow further over the long-term if markets perform well. As an example, if you invested £1,000 in a Wealthify Stocks and Shares ISA for 10 years, you could end up with £1,3671. And if you kept it invested for another 5 years, you could end up with £1,653.2
Past performance is not a reliable indicator of future results.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.
- This is the projected value for a Confident Plan (medium risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £955.19. If markets perform better, your return could be £1,908. Values correct as of 17/05/2023.
- This is the projected value for a Confident Plan (medium risk Plan) with an Original theme. This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £1,093. If markets perform better, your return could be £2,468. Values correct as of 17/05/2023.