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What higher inflation means for savers and investors

What higher inflation means for savers and investors
The drivers of inflation are becoming more broad-based, though still goods-focused, and will therefore affect everyone across society. Photo: Li Ying/Xinhua via Getty (Xinhua News Agency via Getty Images)

Rising UK inflation means that Britain’s cost of living squeeze will continue to get tighter over the coming months, particularly when energy bills jump in April, and the chancellor’s tax rises come into effect.

On Wednesday, the Office for National Statistics (ONS) revealed that the Consumer Prices Index (CPI) jumped by 5.4% in the twelve months to December, which is not only higher than the 5.1% recorded in November, but is the highest twelve-month reading since March 1992.

The drivers of inflation are becoming more broad-based, though still goods-focused, and will therefore affect everyone across society.

Here is what higher inflation means for households:

Watch: What is inflation and why is it important?


Household services, which includes gas and electricity, were among the biggest contributors to the rise last month. The price of electricity is up 18.8% in a year, and gas is up 28.8%.

In addition to this, price rises are being most keenly felt in transport and fuel, as well as energy, which are areas where expenditure is unavoidable. This constitutes a bigger slice of budgets for those on lower incomes.

“The fact that this rise was expected doesn’t make it any easier for households to manage the steep rise in the cost of living,” Becky O’Connor, head of pensions and savings at Interactive Investor, said.

“It’s clearly very hard for low income households already living on the edge to manage increases in the cost of essentials such as food and energy — these are not easy areas in which to make cutbacks — particularly in a cold winter.”

The Bank of England (BoE) expects inflation to peak around 6% in April, but unless there is significant intervention in the energy market, experts believe it could go as high as 7%.


Higher inflation makes it even more difficult for your savings to keep pace with price rises, eroding the value of cash savings.

Soaring inflation also makes it harder for those trying to invest their pension for growth to keep that money growing in real terms.

Returns from equities have evened out at about 5% over the years — less than the current rate of inflation. This means they are a great way to beat inflation and grow wealth over the long-term.

Sarah Coles at Hargreaves Lansdown said: “For money you don’t need for five to 10 years or more, you can consider stock market investments. The value of your investments will rise and fall in the short term, but over longer periods you should be able to ride this out and your investments stand a much better chance of outstripping inflation than they would in savings accounts.”

Read more: UK cost of living to rise as BoE upgrades inflation forecasts

Jason Hollands, managing director of BestInvest, added: "Owning a low-cost UK tracker, such as the Fidelity Index UK fund, which has a tiny annual running costs of 0.06% on its P shares, will give you a big slug of exposure to financial stocks due to the profile of the UK stock market.

“A combination of high inflation and rising rates isn’t just a UK issue, but a similar story across the globe.

“One way to play the financials theme globally is through the Polar Capital Global Financials Trust, which is a UK-listed investment trust. Two-thirds of the portfolio is invested in banks, with the remainder invested in a mixture of diversified financials, insurers and fintech companies — including some exposure to Asia.”


Rising inflation means shrinking pay packets. UK wage growth already lagged behind inflation in November, with real average weekly earnings falling during the month for the first time since July 2020.

Average total pay, including bonuses, grew by 4.2% in the quarter to November, while basic pay without bonuses was up 3.8%. Average total pay growth for the private sector was 4.5% in September to November, while it was 2.6% for the public sector.

Frances O’Grady, general secretary at the Trades Union Congress (TUC), said: “We urgently need to get pay packets rising across the economy — or too many families will have to choose between paying soaring bills or putting food on the table.

“Ministers must give unions more power to go into workplaces and negotiate better pay and conditions, give our public sector workers a decent pay rise, and get the minimum wage up to £10 an hour immediately.”

Read more: UK wages fall below inflation as jobless rate declines

Interest rates

Savers with cash sitting in deposit accounts should take little comfort from the fact that the Bank of England will probably hike its benchmark rate a couple more times this year.

Soaring inflation piles the pressure on the BoE when it meets to discuss rates on 3 February. Threadneedle Street has a 2% inflation target, meaning current rates are more than double.

This, coupled with falling unemployment and record low redundancies, makes a stronger argument for raising rates.

However, Coles said the Bank “won’t want to panic borrowers, businesses or investors by raising rates too far or too fast”, but it can’t afford for inflation to get out of control either.

Watch: Will interest rates stay low forever?


A large proportion of low income households are pensioners. Age UK has estimated there are more than 2 million pensioners living in poverty in Britain.

Those receiving the state pension will receive a 3.1% uplift in April, which is dwarfed by the current level of inflation.

The imbalance between state pension rises and inflation rates, which are likely to rise further by April, will provoke further calls for the government to consider a more generous uprating that properly reflects the difficulty many older people now face.

The value of wealth built up over a lifetime’s work is being eroded every day it is held in cash, leaving some at risk of running out of their private pension money sooner into their retirements.

Watch: How to save money on a low income