While some economists have suggested that inflation may have peaked at 10.1% in July (it subsequently dipped to 9.9% in August as fuel prices depreciated), others believe that it could move above 11% before the end of the year in the UK.
What’s more, the Bank of England (BoE) has forecast that the rate of inflation will average out at about 9% over the course of the next two years, meaning that households will continue to struggle for the foreseeable future at least.
This will be particularly worrying for people approaching their retirement. But what steps can you take to prepare for inflation during your retirement?
What is Inflation?
Broadly speaking, the tern ‘inflation’ describes a general increase in prices, which may ultimately translate into a decline in a particular currency’s purchasing power over time.
In the UK, this is measured by the so-called “Consumer Price Index” (CPI), which monitors and records the average change in prices paid by consumers over time. This also covers a broad range of services, and has typically remained relatively stable for the last 20 years or so.
For example, the inflation rate has hovered within touching distance of the 2% mark during this time, while this is also the target rate of inflation set by the BoE. This target is set because a low and stable level of inflation actually helps to stimulate a healthy economy, in which customers are encouraged to spend within their means.
When inflation soars far beyond the target rate of 2%, however, it becomes unstable and makes it incredibly hard for households to manage their finances.
Disposable income levels also decline as inflation outstrips earnings (which is currently happening in the UK), while you may also see the value of your savings and cash holdings depreciate as a result.
What’s the State of Inflation in the UK?
While we’re currently experiencing the highest level of inflation for nearly 50 years on these shores, the rate has previously peaked at 25% during the First World War and 24% during the 1970s.
However, the current rate of inflation remains incredibly high, while equity release advisor, Key have recently released a report that suggests only two out of every five (37%) of over 55’s have planned for the impact of inflation on their spending power post-retirement.
This means that these individuals could see the value of their long-term savings diminish, so it’s important to take action and factor inflation into your planning. Of course, some 31% of Key’s respondents also failed to plan for inflation due to its innate unpredictability, so a sensible course of action is to ensure that your cash savings are held in an account with an optimal rate of interest.
This is easier now that the BoE has embarked on its mission to continually hike the base rate, partially as a response to rampant inflation and the devaluation of the pound.
For example, you could commit your cash to a ‘lifetime ISA’ which can be opened by applicants up to the age of 60 and enables you to save up to £4,000 per annum. Up to 25% of your investment will be given back each year, creating a significant boost for your retirement fund.
If you have a greater appetite for risk, you may want to consider investing your cash in stocks and shares accounts.
A stocks and shares ISA affords you easy access to relative safe have assets such as the S&P 500 index, which will deliver incremental returns that are likely to beat the current rate of inflation on average. Of course, there’s also the added risk that your accounts could lose value over time, but this is offset by the prospect of enhanced gains.