The global impact of inflation rate as of 2021 has been 3.5 per cent, with an expected inflation rate of 4.3 per cent in the first half of 2022. The increasing inflation will ultimately erode the purchasing power of the people in the economy, as things will become more expensive, and money in hand will not be valued as much as it currently is. Especially after the coronavirus outbreak, inflation in most countries has increased along with interest rates falling and the government trying to stimulate the economies. Demand has surpassed the supply of products due to worldwide lockdowns, causing major product shortages and a spike in prices. Everything from crisps to cars, doors to diamonds, hamburgers to housing has witnessed an increase in price over the last few years.
What is inflation?
Inflation is the increase in the prices of goods and services of a country, along with a decline in the purchasing power of the country’s citizens over a period of time. It is the rate at which the prices increase and is a broad measure of the cost of living in a particular country. The higher the inflation, the higher is the cost of living and the lower the economic growth. Hence, it is important for a country to grow economically to have a low level of inflation rate, around 2 per cent at most.
What is the impact of inflation on your cash?
In the short run, the impact that inflation has on your cash is not a lot to worry about. However, the same inflation in the long term can cost you a lot and significantly decrease your purchasing power. Every percentage point increase in inflation leads to every currency value buying a lower quantity of goods. That means everything you can buy for £100 today; you will not be able to buy in the next few years if inflation increases at the same speed. This will also impact the value of cash you have in hand, as every passing year will devalue the currency you hold in terms of cash.
For example, if you hold £100,000 in cash with you right now, everything that it can buy today will not be bought in the next few years, and you will only be able to buy things worth £80,000 or less with the £100,000 you have with you today. This means a total loss of £20,000 or more can be expected in the coming years with your cash holdings if inflation increases the same way it has been over the last couple of months.
Steven Saunders, the director at Round table Wealth Management, says, ‘all of this means your paycheck is not going as far as it once did unless your wages are increasing at the same pace, which has not been the case for most individuals’, throwing some light upon what is the true impact of inflation on cash. With this in perspective, people are really underestimating the true impact that inflation will have on their cash holdings in the coming months.
What is hyperinflation?
Hyperinflation is a deadlier version of inflation where the prices increase rapidly. The value of the currency starts tumbling with a major economic downturn that leaves citizens with less to no value of their cash in hand. Prices increase by at least 50 per cent each year, and if they do not stop, the economy is bound to crash. A prime example is that of Venezuela. It also leads to wars, civil unrest, and other civil issues that make the economic currency worthless after some time.
So, can you save your savings from the impact of inflation?
Well, in short, yes. You can save your money from eroding due to inflation in the coming months and years. However, this is only possible by shifting your money from laying around to an investment opportunity that leads to growing your money over a period of time. You can invest in bonds, shares or even real estate, for that matter. Investing in the commodity market is also a safe choice since commodities are the first things to get impacted due to inflation, in the direction of the inflation itself. Hence, with every increase in the price of commodities, your investment money will also increase. This does involve some risk because if the prices of the bonds, stocks or commodities fall, so will the invested capital. We do not wish to recommend any investment arena out of financial advice, and therefore our suggestions should not be taken as a piece of legal advice. Instead, proper research and analysis must be conducted before investing your money in any investment opportunity.
If you want to learn more about how to protect your cash from inflation, request an introduction to speak with a finance professional.
