Budget 2021 update: What does rising inflation mean for savings and investments?

Rishi Sunak’s Budget has undeniably set out to create a higher wage, higher skills, higher productivity economy post Covid. With better-than-expected growth figures projected by the Office for Budget Responsibility, the Chancellor had some room to manoeuvre.

Whilst this week’s Budget may have caught our attention with the Government’s commitment to infrastructure, innovation and transport in the North West; financially it may have struck some as underwhelming, with few surprises following announcements in the preceding weeks.

The one key area that all advisers at Beaumont Wealth have been analysing is the Chancellor’s acknowledgement in the latest budget that, “People are concerned about global inflation – but they have a government here at home ready and willing to act.”

The Chancellor suggested the Bank of England would have to raise interest rates in order to bring rising inflation, currently at 3.1%, under control.

This Budget represents a significant economic stimulus, and perhaps suggests the Chancellor is determined to secure the recovery, even if does lead to increased inflation.

This isn’t to say that rising prices are not a concern for the Chancellor, and he outlined the challenges posed by inflation at the very start of his Budget. However, he was keen to frame this issue as a global challenge, rather than anything “unique to this country”.

The chancellor suggested to MPs that the UK economy is recovering faster than our G7 counterparts, however, inflation is rising due to global factors of the world opening up after the pandemic and demands for goods increasing. What does this recovery mean for finances and investments?

With inflation (CPI) set to rise to 4% over the next year, the spectre of a cost-of-living crisis is a very real danger to the Government’s plans. It’s vital to remember as well that any sustained increase may force the Bank of England’s hand on interest rates, a development that would evaporate any additional wiggle room acquired through revised Office for Budget Responsibility (OBR) forecasts.

UK economic growth for 2021 has been revised; Sunak advised that the OBR has increased its forecasts for UK economic growth and now expects gross domestic product (GDP) to expand by 6.5% this year compared to the 4% it forecast at the Budget in March. This is below what the Bank of England expects – it is predicting 7.4% growth; meaning that recovery from the depths of the pandemic is faster than expected.

Markets expect the Bank of England to increase interest rates – currently at a record low of 0.1 per cent – by the end of the year, with rates rising to 1 per cent over time. Senior figures at the Bank have indicated they believe a rate hike may be the only way to bring inflation under control.

An economist will tell you that inflation is the term used to describe the general rise in the price of goods and services over a period of time. Put another way, inflation is when money loses value over time. Think about it in terms of what your money can buy you now, as opposed to two years ago: In the real-world prices for goods and services are increasing and the pound in your pocket does not go as far as it used to.

The Government have a target inflation of 2% per year. This means that if you started with £10,000 in real terms its spending power will be equivalent to approximately £9,800 in one years’ time.

Money in the bank is vulnerable to inflation. When we invest, we often look for a return at least above inflation and charges. This is regarded as a “real rate of return’ – as you now have more spending power due to the growth.

Whilst rising inflation globally can prove problematic, it can also open up a number of exciting opportunities for a diverse portfolio of investments: the Chancellor also highlighted a commitment to investment in innovation and reducing the UK’s net greenhouse emissions to zero by 2050 to combat climate change. Depending on your priorities and current personal circumstances, green investments open up new opportunities in the investment market.

If you want your money to grow, we need to ensure that the interest rate on your savings is as productive as possible to offset the impact of the rate of inflation. Fixed interest bonds and cash perform poorly in high inflation periods. The key to a good performance during inflationary times is a well-diversified portfolio, with inflation hedged asset classes kept under review, which can then be invested in when the timing is right. These often include gold, commodities, and some real estate investments.

You can be assured that Beaumont Wealth will continue to monitor the fluctuations in interest rates with avid interest: We regularly review our clients’ holdings, whether you’re invested in our model portfolios or our bespoke solutions.

With our plethora of experience in wealth management we have navigated such uncertain territory before and we will continue to advise our clients on the best possible solutions based on their personal circumstances and objectives, risk aversion and utilising our professional expertise.

To use Rishi Sunak’s words, there are “challenging months ahead” – but his Budget sets out a plan, for a “new economy, post-Covid”. If you would like to know more about how we can help you make the best-informed choices for your savings and investments in the current financial climate, please get in touch.