Investing can feel like a luxury during inflation

Chloe Cheung

Chloe Cheung

Savings rates are finally starting to look a little more attractive than before.

Now at 1.25 per cent, the Bank of England base rate has increased following every Monetary Policy Committee meeting since December, after remaining below 1 per cent for more than a decade.

Yet when comparing saving in cash to investing, we are often reminded that the latter has the potential to outpace both savings rates and inflation.

Analysis from Barclays suggests that investing £10,000 in UK shares would have been worth more than £27,400 by December 2021 after 20 years, compared to around £17,750 held as cash.

And with UK inflation having hit a 40-year high in May, reaching 9.1 per cent, it drives home the reality that even the best fixed savings rate of 3.30 per cent currently pales in comparison.

But with the prospect of the cost of living continuing to rise, investing can feel like a luxury.

Indeed, a quarter of adults (24 per cent) have been addressing the rising cost of living by making less car journeys and cutting down on their grocery spend (37 per cent), for example, according to a May survey from Legal & General.

An Interactive Investor poll the month before also found that a quarter (24 per cent) of respondents had stopped paying into a long-term investment account in response to inflation.

There is a sense of déjà vu, when during lockdown discretionary spending was curbed, creating a cohort of so-called ‘accidental savers’, while others sought financial support.

Bearing investment risk during inflation

Investing can feel like a luxury especially when considering some of its downsides; namely that investments can fall in value, and you could end up with less than you put in.

Putting for instance £1,000 into investments with the potential for it to drop by, say, 5 per cent within the next few weeks can feel like a more significant loss when products on supermarket shelves are noticeably rising by 10p here and 50p there.

In contrast the security that comes with saving in cash, while interest rates are rising, can feel comfortable and help to cancel out rising expenses in the short-term, to an extent.

And for the ‘accidental savers’, rising interest rates are providing another boost to funds accumulated during the various lockdowns.

A test of mettle

Particularly for those who prefer the security of saving, now really should be the time to review returns on cash.

While providers have been passing on base rate rises to savers, there still exist accounts paying as little as 0.01 per cent for easy access to cash savings.

Meanwhile, the potential for the value of investments to drop over a relatively short period, at a time when consumers grapple with rising prices, puts acceptance to the test of another familiar mantra about ‘time in the market, not timing the market’.

The careful balance between being able to meet rising outgoings, and saving for the future, highlights issues such as whether the government should or should not reduce the Lifetime Isa withdrawal charge, like it did during the pandemic.