7 January 2022

Why Cash Isn’t King When Inflation Reigns

Is now the time to look for long-term alternatives?

The effect of inflation over time can be detrimental for those keeping large sums in cash and attracting interest at a low or even zero rate. The combination of rising inflation and low interest rates make holding cash unappealing. With many people underestimating the damaging effect of low interest and high inflation on their cash savings, a continued period of low interest rates on cash savings and rising inflation could pose a real risk to savers in 2022, even if the Bank of England (BoE) moves to increase interest rates further in the coming months.

Savers with large amounts of money sitting in cash should not be lulled into a false sense of security if interest rates creep up.

Currently 8.6 million consumers hold over £10k of investable assets in cash. [1]

The damaging effects of high and rising inflation will likely more than wipe out any uplift a higher interest rate will give to the value of cash savings.

Interest ‘Base Rate’ Increase

Inflation is expected to average over 4% this year, peaking at close to 5% in the spring [2]. The BoE may look to dampen the effects of soaring prices by further increasing the interest ‘base rate’. While this may offer some relief if passed on to savers, the average easy access savings account is currently sitting at just 0.19% [3] and any upward change is expected to be small. As the economy continues to recover from the COVID-19 pandemic last year, we are experiencing a sharp rise in the cost of living.  During a period of high inflation, people will notice a dramatic decrease in their purchasing power over time, particularly if their wages don’t keep pace or if they have savings in cash.

Damaging High Inflation

Following many years of a low inflation environment, people may have forgotten how damaging high inflation can be. But in the coming months and years savers should think carefully about where they put any additional cash that is not needed in the short term.

For money beyond your emergency fund, you may want to consider investing, which offers the potential for inflation-beating returns.

If appropriate to your particular situation, you should be prepared to take some risk to preserve the value of your money by combating the effects of inflation.

Should you wish to pick up this discussion with one of our advisers (or arrange a no obligation meeting with one of our advisers) then please give us a call on 01786 431 703, or drop us an email with your contact details to info@retinvest.co.uk

Source data:

[1] https://www.fca.org.uk/publications/corporatedocuments/consumerinvestments-strategy

[2] https://obr.uk/overview-of-the-october2021-economic-and-fiscal-outlook/

[3] https://moneyfacts.co.uk/news/savings/ savings-rates-continue-to-rise/