Inflation: What is it, and should you let it affect your investment planning?
With prices on the rise, many people want to know more about inflation. We take a look at what it means and how it could affect your investments.
We know that counting the pennies might be a bit of a romance killer. However, if you are thinking Valentine’s Day seems more expensive this year, you are right! Whilst the price of gold has held firm since last year, the cost of many valentine’s classics has gone through the roof. The price of chocolate is up 9%, whilst steaks are a sizzling 154% more expensive this year.
And who’s to blame? In a word; Inflation.
There’s a fair amount of talk in the financial press now about rising inflation, at Skybound we don’t pay much attention to news reports though as they can be written with a dollop of sensationalism and we’re not in the business of selling column inches – we’re in the business of growing our clients’ wealth over the long-term.
However, we know with inflation currently high, that many people want to know more about what inflation means and how it will affect them and their investment plan, here is everything you need to know...
What is inflation?
Inflation is the word we use to describe the rise in prices over time.
How is the inflation calculated?
There are several way to calculate inflation. One of the most common is the percentage change in the Consumer Price Index (CPI), which measures the cost of a typical basket of goods, including food, energy, leisure spending and transport.
How does inflation increase over time?
Over the past 20 years, on average the inflation rate has been around 2%, ranging from a high of 4% (if we exclude this year)to a low of 0.6%.s.
What has caused the spike in inflation?
It had fallen to almost nothing in 2020 as economies ground to a halt due to the crippling impact of worldwide lockdowns.
Enter the biggest government spending spree since World War II. To keep economies afloat, governments around the world pumped trillions into them. When there’s a big increase in the money supply, the demand to spend it can outstrip the supply of things to spend it on. When that happens, prices are pushed up and you get inflation.
Many would argue inflation was therefore inevitable. Rising from a low base though can make it appear worse than it really is. Some believe the recent price rises are simply inflation that would normally have played out in 2020, but instead has been pushed back into 2021 and 2022 due to all the economic distortions.
Will Inflation keep rising?
The 10-year Breakeven Inflation Rate is, which represents market inflation expectations over the next decade, is currently slightly higher than the governments target of 2%. But remember the Breakeven Inflation Rate is just a prediction, and expectations can change in either direction. For now though the market doesn’t seem to be giving much indication about future inflation getting out of hand.
Of course, markets and economic forecasts could turn out be wrong – they often are. Whether or not inflation keeps picking up or slows back to levels on par with recent years though, one thing’s almost certain – inflation will nearly always be with us.
Should you care about inflation?
Inflation erodes wealth. Money now will be worth less in the future as it’ll buy fewer things as prices rise. A little bit of inflation may not seem like much, but over time its effect can have big consequences. Even with 2% inflation, left unchecked your wealth drops by nearly 20% after 10 years, and with 4% inflation your money is worth only two-thirds what it was.
Impact of inflation on £/$/€ 10,000
So, although it’s uncertain whether inflation will keep rising or not, any inflation will hold back your spending power in the future. Therefore, if you care about having enough income to live the retirement you want, or make sure those savings for your children keep pace with rising education and housing costs, inflation is something you need to plan for.
What can you do about inflation?
Although rising prices are usually an unavoidable part of the world we live in, there is something you can do to protect your wealth from being eroded by inflation – grow it. By growing your wealth, you can not only stay ahead of inflation, but potentially increase your purchasing power for future years.
That’s where Skybound Wealth comes in.
We invest the wealth you entrust to us in portfolios that aim to deliver not only inflation-beating returns, but also market-beating performance too. Although the future of inflation, the economy and markets are unpredictable – as it has been and always will be – our portfolios invest in things that have stood the test of time. Whether inflation goes up, down or sideways you’ll be invested according to what’s most important – helping you achieve your financial goals.