How will rising inflation affect financial planning?

How will rising inflation affect financial planning?

Inflation has been the topic of discussion this month, with the rate rising higher than the Bank of England’s target of 2 per cent each month since May.

The bank is now predicting that inflation will rise above 4 per cent later this year, potentially reaching its highest level in a decade. 

Despite this, the central bank believes this rate increase is “transitory”, and has so far ruled out bringing forward a rise in interest rates, which is its main tool for controlling inflation.

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So will inflation keep rising? And how does all of this affect financial planning?

In this week's FTAdviser podcast senior reporter Sally Hickey is joined by Lawrence Cook, head of intermediary distribution at Sanlam, and Michael Copeland, a senior area manager at Wesleyan. 

“Predictions have made fools of a lot of people”, said Cook. “We didn’t expect to have low unemployment, fast growth, so predicting what the inflation rate will be next year is tough."

He added Sanlam’s chief investment officer, Phil Smeaton, thinks the central bank’s estimate of inflation peaking at 4 per cent was within a sensible range of probabilities.

“The difficulty comes in that even if that is correct asset prices will react somewhat more violently than we’ve seen in the past so that can have an impact on clients' wealth and portfolios,” he said.

Copeland said the problem was inflation can chip away at real savings.

“[Inflation] poses a stealth threat to investors as it chips away at real savings. Most people who invest tend to increase their long term purchasing power, and inflation puts that goal at risk,” he said.

“I have a saying that it’s all about time in the market rather than timing the market and I think some people have been caught out by the post-pandemic surge in prices.

“It’s all about clients' needs and their longer term objectives. [Trying to] correct to chase the market will have a negative effect on your portfolio and sometimes you just have to ride these things out.”

Cook agreed, saying: “Be wary of any knee jerk responses. There are some adjustments that can be made, especially for advisers with clients who have a short term demand on capital.”

He said if advisers have a client who will need cash within five years, they might consider whether to start crystallising assets or allocating more of the portfolio in cash.

“The decumulation does not start the day you retire, it starts really with the planning leading up to that,” he said.