Inflation at 9.1%: What it means for consumers, their savings and investments

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, said: 

“Inflation at 9.1% may sound like a modest increase on April’s 9% reading, but it is only a taste of what is to come.

“With the Bank of England warning that inflation might exceed 11% later this year when energy costs are set to soar in October in line with Ofgem’s expected increase in the price cap to £2,800, the situation is set to get much, much worse.

“Rampant inflation is making it increasingly difficult for people to balance their finances as price rises eat away at their spending power. You only need to look at the strike action sweeping the UK right now to understand the damaging impact of rising prices on household budgets.

“While Rishi Sunak’s cost-of-living handouts may ease the burden slightly for some, with the first payments to the most vulnerable households starting next month, the latest inflation hike comes as real wages dropped 2.2% on average in the three months through April - the biggest decline since 2011.

“With the inflationary pressures largely driven by soaring food, fuel and energy prices - set against the backdrop of the war in Ukraine and the global supply chain challenges - there is little hope in the near-term for consumers who are hoping things will get better soon.”

“People’s spending power is now severely hampered, and households need to do some serious financial stock-taking if they want to continue to afford the level of lifestyle they have become accustomed to.

"With prices heading ever higher, slashing budgets now to reduce spending is vital for those that want to ride out the year with their bank balance still in the black, as runaway inflation means your salary simply does not stretch as far.

“Making stringent cutbacks on everyday spending and minimising luxuries such as eating out, holidays and clothes shopping will all help but for some households already nearing breaking point, starker choices will have to be made. These could include more drastic cuts such as going down to one car or even considering moving to a smaller property to reduce mortgage or rental payments.

"One slightly bright note is that the effect of inflation on your finances depends entirely on your personal spending habits. One person’s inflation rate might be even higher – or lower - than the overall index as the ONS calculates the figure from a virtual basket of 700 items to represent the goods and services that consumers typically spend their money on.

“While the basket includes the everyday essentials, such as bread and milk, it also includes big ticket items such as buying a car, flights or a concert ticket – items you may not spend on meaning your inflation number could be lower. It might be a wise move, therefore, to assess which of the goods and services you spend on are eating into your income the most and cut those first where possible.

“Savers that might have been celebrating the BoE’s latest quarter-point hike in the base rate to 1.25% won’t be partying for very long.

“While banks and building societies are slowly edging up the savings rates they offer, this is little comfort for savers who are already seeing their cash pots gobbled up by rising prices - delivering a negative real rate of inflation on their savings.

“However, it is still important to have some cash stored in an easy-access savings account as an emergency backup for any unexpected expenses, so shop around for the best rates to ensure every penny is working as hard as it can.

“If you can afford to lock away money for a longer-term horizon, such as five to 10 years, then investing into an ISA or SIPP could be an inflation-beating strategy.

“Markets may be extremely volatile now but holding onto a large cash balance, either because you are unsure about where to invest or are waiting for markets to fall, is also a bad idea. This is effectively ‘lazy money’, which is seeing its real value eaten away.

“While pension savers may consider reducing or stopping the pension contributions they make, as they focus instead on meeting their everyday bills, it is better to make cutbacks elsewhere as any money directed towards pensions and investments has a better chance of beating inflation thanks to the beauty of time.

"In turn, this will deliver a growth rate that combats the effects of inflation on your money. Pensions typically grow faster than inflation: between 2015 and 2019 pension funds grew by 7.4% on average a year – much higher than the 1.53% inflation seen over the same period.

“There are also generous tax benefits linked to paying into a pension as your employer will pay into it too and the government will boost your contributions with tax relief. Plus, your money will also benefit from the magic of compound interest along the way.”

Jason Hollands, Managing Director of Bestinvest, adds: 

“Inflation has been the dominant theme looming over the markets this year and will continue to be so for some months yet until there is a degree of confidence that it has peaked. 

"While the Bank of England has signalled it is determined to tackle inflation, the levers it can pull have their limits. All the UK rate rises in the world won't drive global oil, liquid gas, or wheat prices lower when a war is going on.  
 
“Furthermore, last week's 25 basis point hike by the Bank of England appeared relatively timid compared to the Fed's 75 basis point rise. Divergence in the pace of monetary tightening is a factor driving exchange rates movements. An additional inflationary headwind for the UK is the relative weakness of Sterling, which is adding to the cost of imports. 

“In this environment of high inflation, rising borrowing costs, slowing growth and Sterling weakness, shares in large UK listed companies should continue to be relatively well positioned given around three quarters of the FTSE 100’s earnings are made outside of the UK. Defensive parts of the market to consider include consumer staples and healthcare stocks. When inflation is high and growth is slowing, investors should above all focus on businesses with strong pricing power that provide goods and services that people will continue to need irrespective of the economic cycle.

“The declines in global equity markets since the start of the year - prompted by inflation and rising rates - have seen previously excessive valuations in global equities deflate. Fundamental valuations are back in sensible territory again, which should prove encouraging for those considering making new long-term investments.

“Bear markets invariably turn out to be great times to invest with the benefit of hindsight - but it never feels like it at the time. A sensible way to invest in the current environment, is to drip feed cash in gradually rather than try to guess whether the market slide has bottomed out." 

Bestinvest is an award-winning, digital investment platform for people who choose to make their own investment decisions but with the support of tools, insights and qualified professionals. It offers access to thousands of funds, investment trusts, ETFs and shares through a range of account types, including an Individual Savings Account, a Junior ISA for children, a Self-Invested Personal Pension and General Investment Account.   

Alongside providing investors access an extensive choice of investments, Bestinvest also offers a wide range of ready-made portfolios for people seeking a managed approach that suit their risk profile, saving them the need to select and monitor their funds themselves. These include a highly competitively priced ‘Smart’ range that invests through low costs passive funds, as well as an ‘Expert’ range that invests with ‘best-of-breed' managers. Investors in ready-made portfolios benefit from a low-cost account fee of no more than 0.20% pa.    

Bestinvest has recently relaunched with a unique range of new features and services to help people better manage their long-term savings, including free investment coaching from qualified financial planners, low-cost fixed fee advice packages and advanced tools to help people plan goals and monitor progress towards achieving them.    

Bestinvest is part of Evelyn Partners, the UK’s leading wealth management and professional services group created by the merger of Tilney Smith & Williamson. Evelyn Partners is trusted with the management of £55.8 billion of assets (as of March 31, 2022) by its clients, who are private investors, family trusts, entrepreneurs, businesses, charities, financial advisers and other professional intermediaries.