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How Does Inflation Affect Your Finances?

Inflation rose sharply by 0.6% in December 2020, despite a Christmas lockdown, but what does this mean for you?

Understanding Inflation

At its most basic level, inflation is the rate at which the price of services and goods increases. This is important for all households, as it affects the cost of living and how much you can buy with your money.

What is of particular importance when it comes to inflation, is the growth of wages in relation to the growth of inflation. If wages don’t keep up with inflation, then the standard of living will fall as a consequence.

Is Inflation a Bad Thing?

No, in small quantities of around 2% to 2.5%, inflation can result in consumers buying products sooner, and in response to this increase in purchasing, companies are in the position to increase wages. This can result in a welcome boost to the economy which benefits everyone.

How Does Inflation Affect Me?

Inflation is the most important factor considered by the Bank of England when they are setting the ‘base interest rate’, which refers to the interest you will receive on savings, and debt. Low inflation will often result in the Bank of England cutting interest rates, which is great for borrowers, but not so great for savers. Presently interest rates are at a historic low of just 0.1% in an attempt to restore the economy following the pandemic.

How inflation will affect you very much depends on your unique circumstances. Savers, and in particular retirement savers will experience a difference in the value of their money in the future when inflation is high.

Inflation can also affect people’s incomes. State benefits and occupational pensions will often rise in response to a rise in the consumer price index.

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