22 Nov Inflation, the thief that keeps on taking
While the sky hasn’t fallen in the wake of the vote to leave the EU as predicted by many economists, the pound has.
Since the outcome of the June referendum, the pound has lurched lower against the dollar, the Euro and other major currencies. On the one hand, this is good news for exporters, as British goods become more competitive in relation to goods from other countries. On the other, the price of goods and services we import from other countries have increased in sterling terms even if foreign firms continue to charge the same amount in their own currencies.
And since we import more goods and services from elsewhere in the world than we export, it stands to reason that this will translate into higher inflation. Added to this, substantial pay rises are harder to come by these days, so even a small rise in the cost of goods and services may have a bigger effect on living standards.
Compounded over a long time, inflation can have a drastic impact on the value of your capital. Even a model showing inflation of 3% p.a. means that the value of money is eroded by about a third in ten years.
The implication of this is that it’s never been more crucial to ensure that your money is working as hard as it possibly can. Keeping money in the bank might feel safe but it’s often counterproductive in the long term unless the capital is meant to meet short-term spending needs. By investing in capital markets for the long term, you stand a better chance of getting a decent return to counteract the effect of inflation.