In recent years, you may have seen prices rise, whether it’s the cost of your food shop or your energy bill.
Although inflation has decreased from a high of 11.1% in 2022, it remained above the Bank of England’s (BoE) target of 2% for most of 2024, ending the year at about 2.5%. This situation is referred to as “sticky inflation,” which means inflation is persistent and won’t go down despite efforts to control it.
Why Are Interest Rates Still High?
To curb inflation, the Bank of England (BoE) gradually raised its base rate from 0.1% in December 2021 to 5.25% by August 2023. They maintained this rate for about a year before starting to lower it in the summer of 2024. Recently, the BoE cut the rate slightly from 4.75% to 4.5% to support slow economic growth. Future cuts are expected to be gradual, as the BoE aims to balance controlling inflation with keeping the economy growing.
Higher interest rates can affect you in different ways. On one hand, they might help your savings grow faster because banks tend to offer better rates when the base rate is high. Currently, the base rate is about 2% above inflation, which is beneficial for savers. On the other hand, if you’re borrowing money, like on a mortgage or a variable-rate loan, these higher rates mean you’ll pay more in interest. So, it’s a bit of a trade-off.
How Does Sticky Inflation Hit You?
Sticky inflation is like a guest who won’t leave your party; it stays around and makes everything more expensive. Prices aren’t rising as quickly as in 2022, but they are still going up, though more slowly. If your wages don’t increase with prices, your money doesn’t go as far as it used to.
Another problem is that many savings accounts don’t offer enough interest to keep up with rising costs, which means the real value of your savings decreases over time. For many years, especially from 2008 to 2021, inflation was higher than the base interest rate, so your savings were likely losing value.
3 Ways to Protect Your Wallet
Here are three simple strategies to manage your finances during inflation:
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Review Your Budget: With rising prices, it’s important to check your budget regularly. Adjust your spending according to your current income and expenses. Keeping track of your money helps you stay focused on your long-term goals, even if you need to make some short-term sacrifices.
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Invest in the Stock Market: Keeping all your money in a savings account might not be enough. While saving for emergencies is important, investing some of your money can help you keep up with inflation. Studies show that cash only beats inflation about 60% of the time, but long-term stock market investments have historically performed much better over 20 years. The market can be unpredictable, but over time it generally grows your money.
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Diversify Your Investments: Don’t put all your money in one place. By spreading your investments across different types, you can protect yourself from rising prices. A balanced portfolio helps reduce risk, so if one area isn’t performing well, another might be doing better.
If all of this sounds a bit overwhelming, don’t worry—you’re not alone. We are here to help you navigate through sticky inflation and keep your long-term goals on track. You can schedule a free, no-obligation chat to see how we could help here. A guide on selecting a financial advisor is also available here.
