In the past few months, you can’t have missed the headlines about the rising price of goods in many countries across the world. According to a recent report published in The Straits Times, economists are raising Singapore’s inflation forecast for 2022 up to 5.5%.
As you’ll know, a small amount of annual inflation can be a good thing. It helps to keep the wheels of the economy turning by encouraging people to spend and ultimately helps the value of your investments to grow.
That being said, while a little bit can be beneficial, having too much inflation can pose a problem for your long-term plans. Read on to find out more about what is causing the recent rise in inflation, how it can affect you, and why working with a financial planner can help you to overcome it.
The rising cost of living is being caused by a variety of factors
After several years of relatively low interest rates and gentle inflation, it seems that the world economy is starting to change. There are several major factors as to why this has happened, including:
• A prolonged period of very low interest rates
• Two years of economic shutdown due to the coronavirus pandemic
• Central banks rapidly increasing the amount of money in circulation
• The disruption caused by the invasion of Ukraine.
The latter of these has been one of the most significant, as sanctions on Russia have caused the price of oil and gas to spike. This has had a knock-on effect for the cost of fuel, transport, housing costs, and some types of consumer goods.
To illustrate this, the chart below shows the annual rate of inflation in the United Kingdom, along with a breakdown of how much prices have risen by in the past year. According to the Guardian, the country is set to have the highest increase in the cost of living among the nations of the G7.
Source: Office for National Statistics, Humans Under Management
Central banks typically control inflation by influencing interest rates
Of course, the main role of central banks in most countries is to control inflation and keep annual price increases at manageable levels.
Typically, the way they do this is by changing interest rates. This affects how much ordinary people and businesses earn on their savings and have to pay when they take out a loan.
When rates are low, this helps to stimulate more demand. Since your money in the bank isn’t growing by very much, you’re more likely to go out and spend it. At the same time, this also encourages people and businesses to take out loans, since debt is cheap.
When rates are high, the opposite happens. Saving becomes much more attractive, so people typically reduce their spending and are more hesitant to take out loans. This can often help to cool the economy when inflation is too high.
Due to the rising cost of living, many central banks have decided to raise interest rates and may increase them further in the near future. While this may help to cool the global economy, it may also lead to short-term pain for consumers and businesses alike.
Working with a financial planner can help you to build an inflation-proof portfolio
As we discussed in our previous article, inflation eats away at the value of your money in real terms. This is especially true if you hold a large portion of your wealth in cash, which doesn’t typically grow as quickly as other assets might.
Over the course of several years, even a relatively low amount of inflation can pose a serious problem. In a worst-case scenario, you may even have to reassess your long-term plans as you may not have enough to enjoy a comfortable lifestyle throughout retirement.
If this prospect concerns you, one of the best things you can do to protect yourself from the impact of inflation is to seek professional advice.
When you work with a financial planner, they can help you to build a portfolio that focuses on growing your wealth in real terms. This can give you greater confidence that you’re on track to reach your long-term goals, no matter what obstacles stand in the way.
During periods of high inflation, it can also be helpful to reassess your spending habits to save more of your hard-earned money. This is another area where working with a financial planner can be useful, as they can offer valuable advice for restructuring your finances.
Instead of worrying about global economic conditions, it can be much more useful for you to take control of your finances by cutting down on any unnecessary expenses. Not only can doing so help you to overcome the rising cost of living and build more wealth for the future, but it can also help to give you greater peace of mind.
Get in touch
If you want to know more about how working with a financial planner can help you to overcome periods of high inflation, we can help. Email us at hello@ascentawealth.com or fill in our online contact form to organise a meeting and we’ll get in touch.
