What Does This Inflation Mean for Your Money?

The older one gets, the more noticeable it is that money just doesn’t go as far as it used to. That is true, not just based on our nostalgia. It’s inflation: money losing value over time.

Winners and Losers

On the one hand, inflation causes prices to go up. Wages normally go up to some extent. But inflation almost always means that consumers need help paying for everything they need with their same income.

But, inflation normally helps stimulate job creation and reduce unemployment. Inflation is also a good thing for people who are paying back fixed-interest rate loans. It means that their loan repayments don’t get more expensive, even though. In contrast, everything else is getting more expensive. The ‘real’ cost of borrowing gets proportionately less.

The factors that determine inflation rates and interest rates are very complex. It can’t be fully covered in a short article. But you can always find out more about these topics with Moneyzine (UK). You’ll find a wealth of information and news at your fingertips.

The current investment environment

In the UK, the inflation rate in October 2022 was the highest in the last 41 years. This pushed prices up and made it difficult for households to make ends meet. Money just couldn’t buy the same amount of goods as before. On top of that, even if people carefully save every little bit of spare cash, they can only get a small amount of interest.

Investing can be a good way to keep your money growing, even when the interest rates are low. But you can lose everything easily if the markets don’t go how you thought they would.

Stocks and shares

If you have money invested in the markets, figuring out how increases or decreases in the interest rate will affect you is far from straightforward. In the short term, equity prices and interest rates usually show an inverse correlation (that is, rising inflation is usually associated with falling stock prices, and vice versa).

Over the longer term, shares can help protect investors against the effects of inflation. Since the value of the shares can increase proportionately – but you shouldn’t count on that. Whether your shares increase or decrease in value depends on a complex interplay among some factors.

When interest rates are steady, investors can add value to their portfolios by buying stocks (known as growth stocks). Which, while not currently performing too well, shows good future market potential. But, shrewd investors tend to steer clear of these more risky stocks during high inflation.

During high periods of high inflation, investors tend to favor value stocks. This is because they have high intrinsic value. For example, they may be shares of mature companies that are well-established and well-regarded.

Advice from the experts

Forbes asked financial gurus in different fields for their top tips about riding out the interest rate crisis. A few of the many points that came out were:

It’s never a good idea to start changing one’s savings or investment practices when economic conditions change. But in the slightly longer term, it seems likely that higher interest rates are almost guaranteed, so practices should respond to this.

Given the current global energy crisis, renewable energy investment trusts provide an appealing and comparatively secure investment opportunity.

Many people worry about taking too much risk when investing. But one should also worry about not taking enough! Low-risk investments need more income to keep up with inflation.

Final Word

That is a point worth repeating: not taking enough risk can be a good way to lose money. But before you take more risks, you need to be confident your money is in the hands of the best possible experts! There is a difference between taking some well-considered risks and being reckless.