Inflation update and planning ahead to protect our savings

EU and Spain inflation

After hitting 10.6% last October, overall EU inflation fell to 5.5% in June and is estimated to be 5.3% in July. 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 remaining above the 2% target until 2025.
Spain’s Consumer Price Index returned to ‘normal’ levels in June, falling to just 1.9%. Transport and housing inflation were in negative territory but food inflation remained high at 10.3% . The CPI estimate for July is 2.3%.

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 expectations. It’s still far above the 2% target and the highest in the G7.

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

Inflation and your savings and retirement income

While falling inflation is welcome news, we can’t become complacent about the inflation risk, particularly when retired. Low inflation may seem harmless, 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 – a 59% reduction in purchasing power.

Plan to protect your savings from the rising cost of living by investing in assets expected to keep up with inflation over the medium to long term.

Working with a wealth management adviser, start by establishing your goals and time horizon and objectively calculate your attitude to risk. Then construct a suitable, well-diversified portfolio to achieve your investment plan and objectives, using quality investment managers, and hold it within a tax-efficient arrangement for Spain. Review your portfolio annually to keep it on track.

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

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