In the 1970s, the rate of inflation in both the US and the UK exceeded 20% for long periods.
That prompted the former US president, Ronald Reagan, to describe inflation as being “as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man”.
Along similar (though slightly less dramatic) lines, former UK prime minister Margaret Thatcher said it was the “parent of unemployment and the unseen robber of those who have saved”.
Since the early 1980s, the rate has not reached those same peaks as politicians have seen low inflation as an economic and political priority. However, as you can see from the chart showing the rate over the last decade, the UK experienced double-digit inflation as recently as 2023.
Source: Statista
Rising prices mean that the value of your money, often expressed as “purchasing power”, is reduced. This means that the same amount of money will be able to buy fewer goods and services than it could previously.
In simple terms, a 5% inflation rate means the cost of your weekly shop will go up from £200 to £210. If your income has not gone up by that amount, you can afford to buy less.
This article looks at why you need to be conscious of how inflation can affect your personal finances, and how you can protect your income and pension.
Your personal inflation rate could be higher than the headline figure
As you will be aware, a headline Consumer Prices Index (CPI) rate of inflation is announced each month.
According to the Office for National Statistics (ONS), the CPI rose by 3.5% in the 12 months to April 2025.
However, that does not necessarily mean that the costs of all goods and services have increased by that amount. As the ONS confirmed, the largest upward contributions to the inflation rate came from household energy bills and transport. But, the cost of goods and services will be affected by different factors, and some may even have reduced over the same period.
Because of that, you will effectively have your own inflation rate, based on your lifestyle and purchasing habits.
For example, if you use your car a lot to travel long distances, a big increase in fuel prices will have a bigger effect on you than on a person who drives rarely. Likewise, if you have a large property, your energy bills are likely to be higher than someone living in a one-bedroom flat.
You can get an idea of how different items can affect your own spending using the ONS inflation calculator.
The buying power of your savings could be reduced by inflation
As you have read, inflation affects the purchasing power of your money. If your income is rising each year in line with, or above, the rate of inflation, then this effect is mitigated.
The growth you enjoy on your savings is determined by interest rates. As a result, if the interest you are earning on your money is below the rate of inflation, the purchasing power erodes. Hence the quote by Margaret Thatcher about the “unseen robber”.
Because of that, it can be advantageous to shop around for the highest rate available and take advantage of special offers such as short-term bonus rates on your money.
Consumer websites such as MoneySavingExpert and Moneyfacts provide up-to-date information about the best rates available, including those that are above the current rate of inflation.
However, investing your money is more likely to provide you with better long-term returns than the interest you will earn through a savings account.
For this reason, it is sensible not to hold too much of your assets in savings. That said, holding money you may need to access at short notice, such as your emergency fund, is a prudent step to ensure you can use it when you need to.
An effective investment strategy can mitigate the effect of inflation on your pension
Over an extended period, the returns you can generate on investments could be well above the rate of inflation.
For example, the Bank of England confirms that the average inflation rate in the UK between 2003 and 2023 was 2.8%.
In comparison, according to IG, the FTSE 100 index produced annualised compound returns of 6.3% (including dividends) over the same 20-year period.
It is important to maximise the growth on assets such as your accrued pension pot. Given those illustrative figures, investing your fund could give you a higher possibility of outperforming the rate of inflation and maintaining the buying power of your money.
Likewise, you will want to ensure that your fund will continue to enjoy good returns once you have started to draw an income from it.
The latest ONS figures show that the average life expectancy for a 50-year-old man is 84, while the equivalent age for a woman is 87. This means that your pension fund could easily need to provide you with an income for 25 years or more, and the income you draw will need to increase in line with inflation to maintain a consistent purchasing power.
A report by Fidelity reveals that, over a 20-year period, an annual inflation rate of just 2% would erode the purchasing value of a fixed income of £10,000 by nearly a third to £6,730. Over the same period, a rate of 4% would more than halve it to £4,564.
For this reason, it is important to bear in mind that your income will at least need to keep pace with inflation, and continuing to invest is a good way to ensure this is possible without you facing the danger of running out of money.
Get in touch
If you would like to talk about your financial planning arrangements and how to mitigate the effect of inflation, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.