Future Planning: How to Fight Inflation

The only way to fight back against inflation is to have a solid plan in place. We’re here to help you build one. To start, we need to explore how exactly inflation could be impacting your portfolio.

What is Inflation?

In a nutshell, inflation is the rate of increase in prices for goods and services; it measures the purchasing power of your money. Essentially, each unit of currency you have today will buy you less in the future. In other words, if you want to live the same lifestyle then you’ll need more money to support it as time goes on.

How Inflation is calculated

Economists calculate inflation in most countries using a price index. In the UK it’s based on the Retail Price Index and calculated by the Office For National Statistics (ONS). Essentially they track hundreds of sample costs of hundreds of items purchased by a cross-section of consumers, known as the “basket of goods”. They compare these costs to a year ago and calculate the percentage increase. 

The Bank of England has an inflation calculator where you can see how UK prices have increased over time.

The current state of Inflation as we enter 2023

It doesn’t take an expert economist to work out that the items in our shopping baskets are costings us significantly more. In the European Union (EU) inflation is currently at 11.1%, the UK isn’t far behind at 10.7% and countries in the Eurozone report average inflation at 10.6%. 

These figures reflect a 40-year high and are fuelled (if you’ll pardon the pun) mainly by oil and gas price increases. The cost of energy has increased due to greater demand in the recovery from COVID-19 and the Russia-Ukraine war impacting oil and gas availability from Russia.

Should you worry about Inflation’s impact on your Future Planning?

Rapid inflation has been harsh for the older generations and current retirees, whose savings/investments/pensions are worth significantly less to them than they had planned. 

For the younger generations, it’s still important to consider how inflation impacts future wealth.  We all need to protect our savings and future income from the rising cost of living: financial planning for retirement wealth is all about making sure your money lasts as long as you do!

How to fight Inflation – Tips from Wealth Management Experts

Although interest rates are rising, and this is good news for savers, we’ve seen that you can’t rely on bank interest rates to grow wealth.  In recent years many savers have been earning real-term negative rates of return on their savings. This isn’t sustainable.

Diversify your portfolio

A diverse investment portfolio mitigates risk and improves your chances of achieving financial success over the longer term. This means your portfolio should include investments in a variety of asset classes, sectors and countries. 

Diversification doesn’t guarantee against loss, but it helps to reduce the volatility of your investment portfolio. If you pop your proverbial eggs in baskets that have different strengths and vulnerabilities, you stand a chance of coming out with some intact. 

The level of diversification you need will depend on your investment goals, your personal tolerance for risk and the skill of your financial adviser.

Inflation hedging options

One option is to invest in assets that are hedged against inflation – this is a strategy that aims to offset any drop in your currency’s value and protect its purchasing power over time.

Potential inflation-resistant assets

These include:

• Inflation-linked bonds – designed to protect investors from the negative impact of inflation by contractually linking both principal and interest payments to a specific price index.
• Commodities and commodity exchange-traded products – tangible assets that tend to hold or appreciate in value during inflationary times. Gold is generally considered a “safe-haven asset”.
• Stocks – stocks typically move negatively with inflation, but a well-diversified stock portfolio should be protective, and most correct for the effects of inflation in the long term.
• Property – usually a resilient investment as property values and rental prices tend to increase at rates far higher than inflation.

Remember to maximise tax efficiency

Going back to the beginning of our blog, while we’ve added inflation to life’s short list of certainties. But maybe tax doesn’t have to be there if there are ways to reduce your tax burden! Depending on your circumstances and country of residence there could be multiple tax breaks available to you.

The powerful impact of compound growth can then help you earn returns on both your initial investment and any previous returns. This can accelerate your investment growth and help you reach your financial goals sooner.  If you can’t beat inflation entirely, you can hopefully outpace it by getting a boost elsewhere. You’re going to need expert financial advice to maximise your tax efficiency, especially if you’re an expat.

The importance of savvy Financial Planning to ensure Inflation doesn’t impact your future 

Making asset allocation decisions can be a complex and difficult process, especially with today’s ever-changing markets and macroeconomic environment. To make informed decisions, maximise your growth potential and understand the investment risk profile of your portfolio, you need significant amounts of time, resources, and specialised skills. Fortunately, we have the experience and expertise to help you navigate these challenges. 

Contact us to start increasing your retirement spending power.

Disclaimer

Remember that past performance is not a predictor of future results. Your investment could lose value as well as gain it, and there’s no guarantee of success. In fact, you could end up getting back less money than you originally put in.