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Rising inflation – what does it mean for your money?

Updated 22 December 2022

5min read

Nick Green
Financial Journalist

Why could our grandparents buy sweets for a ha’penny, but children’s pocket-money is now measured in pounds? It’s all to do with inflation – and your savings, investments and pensions may soon begin to feel the pinch. Article by Armstrong Watson.


It’s often said that inflation is the enemy of the investor – and they also say, ‘Know your enemy’. So what exactly is inflation? It’s commonly defined as the increase in price of general goods and services over time. But it can manifest itself in a variety of different ways, and can have a range of different effects on people’s finances. Also, it’s not always a bad thing. So let’s take a look at the ways in which rising inflation may affect your money and financial goals.

Inflation and you

When inflation rises, we typically feel the effects in the general cost of living, as well as the costs of doing business and borrowing money. It can also affect things like bond yields, which are important for pensions and investments. These are just a few of the many areas that may be affected, whether directly or indirectly.

UK inflation is measured against two indices – the Consumer Price Index (CPI) and Retail Price Index (RPI) – and the autumn figures for the CPI represented a higher rise than expected – from 0.6 per cent in August to 1 per cent in September. The RPI, which includes mortgage interest payments, also rose, from 1.8 per cent to 2 per cent. Since then, despite some fluctuations, inflation has continued its overall climb.

Many economists (including the Governor of the Bank of England) expect inflation to rise further in the near future. Since the vote to leave the EU our currency has weakened, and many expect this to cause inflation to rise. This will increase the price we pay for goods, although the Office for National Statistics (ONS) has stated that there is no evidence to suggest that the weak pound has been responsible for the latest increases in inflation.

Nevertheless, rising costs hit the headlines recently when Tesco and Unilever were locked in a price war. Unilever (which manufactures products such as Marmite, Pot Noodle, PG Tips and Comfort) allegedly asked Tesco to pay 10 per cent more for the supply of their range, principally due to Brexit. Tesco refused and removed many Unilever products from their shelves. The outcome was that both companies saw their share prices fall and quickly agreed on no price increases.

Who’s affected?

Inflation proofing can be difficult. For instance, if your income doesn’t keep pace with inflation, you will gradually begin to feel financially worse off. Businesses find it harder to balance their books if costs increase, while investors and those saving for retirement will encounter similar issues as inflation impacts the real value and return from the money they have invested.

People receiving State Pension

However, some people do benefit. As the basic State Pension has a triple-lock guarantee attached to the payment, this ensures that the State Pension payment increases at either inflation, average earnings or 2.5 per cent (whichever is higher), so those in receipt of the basic State Pension will tangibly benefit – the maximum payment will increase to £122 per week from April next year. Nor is it only older people who can benefit. New parents will see a small increase in both maternity and paternity benefit payments, as these too are linked to inflation.

People receiving tax credits

Others, however, will feel the pinch. Individuals and families receiving tax credits and other benefits are likely to feel worse off, due to a freeze on any increase in payments. This means that if the price of goods rises but income in the form of benefits stays the same, they won’t be keeping up with inflation.

The weekly shop

Many goods and services are imported into the UK, and the fall in the value of the pound has made these them more expensive to buy. As a result, economists are predicting a further rise in prices of many household items.

Cash savings

Those with cash savings have seen their interest rates reduce in line with the reduction in the Bank of England base rate. If inflation overtakes interest rates, then in real terms their return will become negative, meaning that cash may not be a good place to stay in the long term.

Borrowers and mortgage holders

Borrowers, on the other hand, have benefited from falling interest rates – but this situation may not last very much longer, as one of the key weapons against inflation is to increase interest rates, and lenders will follow suit to protect their margins.

Private and workplace pensions

Retirees who have incomes from pensions that are not inflation-linked could start to feel worse off if the prices of utilities and food increase, as their pension income may not keep pace.

Combating higher inflation

Your money (whether it is savings or income after tax) needs to increase by more than the rate of inflation, or progressively it will become worth less. If you have £1,000 stashed under the mattress it will still be £1,000 in 30 years’ time, but due to inflation it will probably have much lower purchasing power than it does today.

The table below compares rates from September 2006 to those in September 2016.

  September 2006 September 2016
Bank of England base rate 4.75% 0.25%
Consumer Price Index 2.4% 1%
Retail Price Index 3.6% 2%


Because inflation is lower today than it was 10 years ago, money doesn’t need to work quite as hard as it used to in order to stay ahead. However, the real rate of return is lower today than it was 10 years ago. So have our expectations changed to take account of this?

What to expect if you’re an investor

Investors generally regard their investments as a means of generating a return better than that available from cash. The same is true for people approaching retirement. Based on the figures in the table above, investments needed to produce a much higher return 10 years ago in order to beat the underlying cash rates available. Assuming that the aim today is still to beat cash, returns from investments don’t need to be anywhere near as high as may have been required previously. However, people’s expectations often remain the same!

The effects of inflation are far reaching and are felt by both individuals and businesses. Inflation isn’t something we can directly control or even influence, but we can take steps to work around it. Therefore it’s important that our financial situations are kept under review, to ensure that our aims and objectives for the future remain on track.

If you are worried about the effects of inflation on your finances, Armstrong Watson can help. Contact our Financial Planning Team for advice or search for a financial adviser near you using the Unbiased search.

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Armstrong Watson Financial Planning Limited is the independent financial advisory division of Armstrong Watson, with offices across the North of England and South Scotland. The firm has over 30 years’ experience of helping to develop business and personal financial strategies for a wide range of clients. Find your nearest office:


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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.