What does inflation mean for my returns?
Inflation rose to 1.6% in December, from 1.2% in November. It now stands at the highest rate that the UK has seen since July 2014.
While 1.6% is still below the government’s official target of 2%, increasing inflation not only adds to the cost of the weekly shop, but also erodes the value of people’s savings and investments.
The effect is particularly stark for money in “zombie accounts”, which pay returns below the rate of inflation: if the rates you’re earning don’t match this figure, you’ll be losing money in real terms – effectively, your money will have less purchasing power.
If you want to get a feel for the effect that inflation has on your returns, there’s a handy online calculator here. You put in your starting amount, how long you plan to invest for, the interest rate you expect to earn and the current inflation rate. For the “compounding” field, put the frequency that interest is paid to you – for example, savings accounts usually pay interest annually.
Peter Behrens, Chief Operating Officer and co-founder at RateSetter, commented: "With zombie accounts paying rates that don’t even match inflation, many savers will see the value of their money reduce in real terms over the coming years. This might prompt more people to consider putting their money to work, by taking on some risk in order to earn a better return through peer to peer lending."
Of course, every cloud has a silver lining: inflation also erodes the value of debt...