Anyone who reads our blogs will often see us talk about inflation and the risks it creates.
But for many people, it’s not always clear why inflation matters or how it affects everyday life.
With inflation staying high in recent years, it’s becoming more important to understand what’s going on.
What Is Inflation?
Inflation simply means a rise in prices over time.
There are different ways to measure it, such as CPI and RPI. These use a “basket of goods” and track how prices change over a set period.
For example:
If a pint of milk costs 50p one year and 60p the next, prices have risen by 20%. That increase is inflation.
Why Is Inflation a Problem?
Inflation reduces the value of your money.
If your savings earn 0.1% interest but inflation is 8%, your money loses value in real terms.
Over time, this can have a big impact on your spending power.
It can also change behaviour. People may spend sooner rather than later because they expect prices to rise further.
What Is an Inflationary Spiral?
Inflation can quickly build momentum.
Businesses raise prices because their costs increase. Workers then ask for higher wages to keep up.
Employers increase prices again to cover those wages.
This cycle can continue and become difficult to control. Economists often call this an “inflationary spiral”.
How Governments Try to Control Inflation
Governments aim to keep the economy stable.
In the UK, the Bank of England sets a target of around 2% inflation. Central banks adjust interest rates and other tools to try to keep inflation under control
What Happens When Inflation Is Too High?
High inflation creates pressure across the economy.
Businesses raise prices. Workers ask for higher pay. If businesses cannot afford this, disputes can follow and productivity may fall.
This can slow down economic growth and create uncertainty.
How Inflation Affects Investments
Inflation plays a key role in financial planning.
When we invest for clients, we focus on growing their wealth in real terms. This means achieving returns above inflation.
However, when inflation rises sharply, this becomes more difficult. Higher returns often require taking on more risk, which may not be suitable for everyone.
That’s why we regularly review portfolios and make adjustments where needed.
Rising inflation is a problem because it reduces the value of money and creates uncertainty across the economy.
Understanding how it works can help you make better financial decisions.
If you’d like to review your investments or understand how inflation affects your plans, our team at Financial Fortress is here to help.
You may also like to read:
Inflation: A Threat or an Opportunity