Spring Statement: Rigby says Autumn inflation rise is ‘startling’
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Some assume increasing interest rates indicate savings will be safe, but skyrocketing inflation rate threatens to dash these hopes as it is predicted to breach eight percent by the end of the year. Chris Beauchamp, Chief Market Analyst at the IG Group, shared why Britons should turn to investing over traditional savings to keep purchasing power in their own pockets.
Record high inflation, the energy price cap increase, tax rises and the Russian invasion of Ukraine has created a melting pot of financial worry for Britons.
While it seems like an insurmountable situation, there are other ways they can manage and utilise their current purchasing power to make the most of their savings.
Mr Beauchamp told Express.co.uk that although cash savings are generally preferred due to their “certainty of no loss”, this is not entirely true.
He said: “They tend to offer relatively little upside. Interest rates on cash savings have remained at rock bottom levels for many years, hurting savers.”
Mr Beauchamp suggested that investing could be the answer to this turbulent situation.
However, it should be noted that every investment has capital at risk.
Because of this, investors are usually advised not to invest more than they could afford to lose.
Mr Beauchamp explained: “Investments, such as in bonds, stocks and other instruments, provide the possibility of greater upside, which over time can compound into significant returns.
“Of course, no investment that provides any real upside comes without risk.”
While savings tends to offer a guaranteed monetary return through interest rates, in situations where interest rates are lower than inflation savers are losing purchase power.
In comparison, investments provides a potential monetary decline, “which can be very protracted”, alongside potentially life changing increases.
Mr Beauchamp continued: “The benefits are clear, in the long-term.
“Stock markets have registered solid, long-term returns, and crucially they have the added benefit of dividends, increasing the return and bolstering the power of compound interest.”
“Investors with a long-term view can benefit from this ‘double-whammy’ of capital growth and interest from dividends, which is the reason why the stock market continues to be the primary vehicle for most investors.”
The Office for Budget Responsibility (OBR) predicts 8.7 percent inflation by the end of the year.
Historically, the last time inflation breached eight percent was in 1991.
Compounded with the cost of living crunch fueled by rising prices, public disposable income has dropped below levels seen during the 2008 financial crisis.
Disposable income represents the amount of money households have left to spend after they have paid their bare necessities and taxes.
This indicates the severity of the current economic climate which will impact the purchasing power of cash savings.
In essence, Britons who keep all of their savings in cash will slowly find they are able to buy less and less with the amount they have saved.
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