The only way is up! Inflation increases

I have often jested with clients that there are three levels of inflation. These are the rate the Bank of England suggests, the alternative and usually higher rate that you pay at the till for your groceries every week and the higher rate that you pay for such things as school fees/care costs.

With inflation currently spiking so significantly, these previous ‘jests’ may wel become Ill advised, especially with Sir Mervyn King, Governor of the Bank of England, suggesting that inflation may well peak above its current level of 4.5% (CPI May 2011) at a rate above 5.0%. Personally, I think this may be undershooting the final highs, but this is conjecture.

What does this mean for your finances, other than seeing your fuel bills rising sharply and any salary increases falling short of the increase figures mentioned above? With the possibility of Bank base rates increasing (an historic favoured tool of the Bank to control inflation), many may also see borrowing costs, such as that for mortgages, increasing in the next 12 months. This possible future increase is likely to see family budgets squeezed even further, if and when they happen.

But what of those who are approaching retirement? Many will know that increases in salaries are usually higher than CPI (Consumer Prices Index) and this difference is unlikely to be enjoyed in retirement. This may make your retirement planning even more important because the cost of protecting against the effects of inflation when buying an annuity are far higher than when buying an annuity on a level income basis. Some clients have calculated, that in their opinion, this ‘cost’ is not worth the loss of initial income. However, others see this decision differently and opt for some form of protection against inflation, using a fixed increase or using and index, such as CPI or RPI (Retail Prices Index). Each choice will offer a differing income, dependent on the individual circumstances. Some prefer to use alternative vehicles for their retirement income, such as income drawdown facilities. However, the effects of inflation still need to be considered when thinking about the real purchasing power of your money, both now and into the future.

Financial planning is about considering the choices that you want to provide for, both now and into the future. Inflation and its effects are going to have an impact on these choices. Each of us is different and this article should not be seen as individual advice.

Speak to an independent financial adviser (IFA) about your needs and aspirations for your future requirements.

Keith Churchouse FPFS

ISO 22222 Certified Financial Planner

Director & Chartered Financial Planner

Churchouse Financial Planning Limited is authorised and regulated by the Financial Services Authority.