Inflation is rising in the UK, mainly due to the fall in the value of Sterling and rising oil prices. Inflation rises mean that goods cost more to buy. As a result you should consider inflation and investments, so this article examines the effects of inflation on your investments.

Key points:

  • About inflation
    • The current rate of inflation
    • Historical inflation data
    • Inflation versus earnings
  • Inflation and investments
    • Which investments beat inflation?
    • Investment risk and inflation
  • How to beat inflation with investments

About inflation

Inflation measures the rise in the cost of buying goods. The UK Government uses the Consumer Prices Index (CPI) to measure inflation. This uses a ‘basket of goods’ to examine how prices are rising in the economy. This is not a perfect measure, as your spending habits will be different to the average. In particular, CPI includes mortgage costs, which affect you greatly if you have a mortgage, and not at all if you do not.

The current rate of inflation

Inflation is rising in the UK, due to a dramatic fall in the value of Sterling after the EU referendum result. This has affected many areas of the economy as imported food becomes more expensive and fuel costs rise. It seems that consumer goods like electronics are also increasing in price. Currently, the inflation rate in the UK is 2.3%. While this is not high compared to past inflation figures, it does represent a rising trend.

Historical inflation data

Here is the percentage change in the Consumer Prices Index since 2006. This chart shows the annual rate of change for CPI.

inflation and investments - change in CPI

Source: ONS

You can see from this data that inflation has been much higher in the past, but that we are clearly on an upward trend.

Inflation versus earnings

If you are working, the relationship between your earnings and the cost of living is an important one. If your earnings rise faster than inflation, the you will feel better off (assuming you buy the same items); if your earnings rise slower than inflation then you will feel poorer.

Inflation vs earnings (10 years)

This chart shows the cumulative change in inflation and earnings in actual terms over 10 years.

inflation and earnings 10 years

Source: Financial Express

This chart shows that inflation has risen faster than earnings over 10 years. Therefore, if you are a worker earning an average wage, you will probably feel less well off.

Earnings relative to inflation

This chart looks at the same data presented in a different way. In this chart, we show inflation as a constant, with the relative change in earnings.

earnings relative to inflation 10 years

Source: Financial Express

This shows that over 10 years, the average earnings have fallen by 3.54% relative to the cost of living.

If we use the median salary in England from 2007, which was £20,300, the same salary would now have the purchasing power of £19,581 today.

Inflation and investments

Inflation is an important consideration for your investments, since it eats into your returns over time. This is a major problem if you have a lot of your savings in bank accounts, since the returns tend to lower than the inflation rate. Over time, you may find that your savings have less buying power as inflation erodes their impact.

Which investments beat inflation?

There is not a definitive answer to this question, but we can say that bank accounts tend to lose money to inflation over time. Other investments such as shares and property tend to do better than inflation over time.

Inflation and investments – data

Here we show the returns before charges for a number of different investment types. We show the actual cumulative returns to 22/03/2017 over 1 year, 3 years, 5 years and 10 years. We also show the annualised returns over the same periods. This means the annual return needed to match the same cumulative return over the same period.

inflation and investments data

Source: Financial Express

We have highlighted in green where the investment has performed better than inflation, and in red, where inflation is greater than the returns of the investment. Of course, none of this is guaranteed to continue, but does give an interesting indication of results.

What this clearly shows is that our sample bank account would have lost money to inflation over each of the periods shown. Our UK shares unit trust would have provided returns greater than inflation over each period shown. Property had greater returns than inflation over 1, 3, and 5 years, but not over 10 years.

Investment risk and inflation

Investing money requires that you take some risks with your capital. If you invest in a bank account, you do not risk your capital (up to the FSCS compensation limit). If you invest in any of the other investments listed above, then you take more risk with your money. This shows that you must take some risk with your money to beat the effects of inflation on your investments. If you are not prepared to take any risk with your investments, you must resign yourself to losing purchasing power on your savings over time.

Investment returns relative to inflation

This chart shows inflation as a constant over 10 years, with the relative returns of our sample investments.

investment returns relative to inflation 10 years

You can see from this chart that the bank account is the only investment shown that lost money compared to inflation over 10 years.

Here is the same data over 5 years:

investment returns relative to inflation 5 years

Again, you can see that the bank account was the only investment shown that lost money compared to inflation over 5 years.

Source: Financial Express

How to beat inflation with your investments

There is no guaranteed way to beat inflation with investments. The best course of action is to assess the level of risks you need to take to generate the returns you want over time. You can then compare this with the level of risks you are prepared to take. You should then diversify your investments as it is impossible to predict future returns; this should minimise risks, while giving you the possibility of greater returns than cash. If you are prepared to take at least some risk with your money, you should have a much better chance of beating inflation over time.

How we help our clients to beat inflation with investments

Our investment management service aims to help you to manage your investments wisely so you can overcome obstacles like inflation. We use tried and tested methods as well as professional management to ensure that you have the best chance of beating inflation over time. Of course, inflation is only one variable you need to examine within your investments, so we prepare your portfolio for all potential circumstances. Contact us to find out more.

Secure your future and live your dreams with Prosper.

Prosper Service

An introduction to Financial Planning and Wealth Management

See how we help people in your situation Prosper...

Choose a financial planning category

The Personal Finance Portal

Model investment portfolio performance


Find out how we can help you to Prosper from your savings.


Find out how we can help you to Prosper during retirement.


Find out how we help you Prosper with an inheritance.


Find out how we help you manage another person's assets using our Prosper service.

The following two tabs change content below.

Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.