Inflation update and planning ahead to protect our savings

It has been two years now since inflation began to climb and we were soon noticing the higher cost of living. Prices peaked last autumn and the situation is improving now. Spain’s Consumer Price Index has returned to normal levels, but in the UK it only dropped below 8% in June.

EU and Spain inflation

After hitting 10.6% last October, overall EU inflation fell to 5.5% in June. Prices have been largely driven, both up then down, by energy costs.

The European Central Bank expects inflation to continue to improve as energy prices fall, food inflation moderates and supply bottlenecks ease, though under current projections it will remain about the bank’s 2% target through to 2025.

Spain’s Consumer Price Index returned to ‘normal’ levels (i.e. close to the 2% target) in June, falling from May’s 3.2% to just 1.9%. Transport and housing inflation are in negative territory but food inflation, though improv-

By Jon Pemberton, Partner, Blevins Franks

ing, remains high at 10.3% .

Unless they are negative, falling inflation rates do not mean that prices are falling, they are just rising less slowly than 12 months previously.

UK inflation

The UK has endured persistently high inflation, but the Consumer Price Index finally fell below 8%, with the

June 7.9% rate beating expectation. Though the lowest since March 2022, it’s still far above the 2% target and the highest in the G7. Fuel prices are falling but food inflation remains stubbornly high at 17.4%.

Earlier in July the Bank of England governor acknowledged consumer prices inflation still unacceptably high but should fall “markedly” over the rest of the year.

Inflation and your savings and retirement income

While falling inflation is very welcome news, we can’t become complacent about the inflation risk and how the rising cost of living affects us over time, particularly when retired.

While the impact of high inflation is quickly noticeable, low inflation is insidious. It seems harmless at the time, but slowly but surely, compounded over the longer-term, erodes the spending power of your savings and income.

As a basic illustration, if you have €50,000 in a current account with no growth, and inflation is 3% every year, after 10 years its value will have fallen to around €37,000. After 20 years it’s around €27,500 and after 30 just €20,555. That’s a 59% reduction in purchasing power.

Unless your savings grow each year, they will buy you considerably less as the years go by. You need to plan to protect our savings and future income from the rising cost of living – making sure your money lasts as long as you do should be an integral part of your financial planning for retirement.

You need to invest in assets that are usually expected to keep up with inflation over the medium to long term. While you may become more averse to investment risk in retirement, inflation is also a risk to your savings. Reduce investment risk by building a suitable welldiversified portfolio around your risk tolerance, circumstances and objectives.

Work with a wealth management adviser to follow a disciplined investment process:

• Establish your goals and time horizon and objectively calculate your attitude to risk.

• Construct a suitable, well-diversified portfolio to achieve your investment plan and objectives.

• Use quality investment managers.

• Review your portfolio annually to keep it on track.

• Be patient and stick with your plan – it is time in the market, not timing the market, that is likely to help you achieve your longer-term goals.

• Hold your investment portfolio within an arrangement that is tax efficient in Spain.

Seek advice from an advisory firm which provides holistic strategic financial planning advice to integrate your investment planning with your tax and estate planning.

CPI data as at 19 July 2023

Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.