Why taking inflation into account is a crucial part of your financial planning.
Inflation may now be lower but ignoring inflation when calculating your long-term finances could leave you with a shortfall.
High inflation has been a major factor over the past couple of years, exacerbated by the Covid-19 pandemic and the war in Ukraine amongst other things. Figures from the Office for National Statistics (ONS) show inflation reached a peak of 11.1% in October 2022, which was the highest level recorded for 40 years.
Perhaps unsurprisingly, research from Ipsos discovered that inflation is the number one global concern in 2024, with 37% of people in the UK saying they were worried about it.
The soaring cost of living over the last couple of years has certainly seen pressure on household budgets and it could well have impacted on your long-term plans too. For example, you might have cut back your savings or pension contributions to help with rising day-to-day costs.
The good news is that inflation has been falling and at 1.7% is now lower than the Bank of England (BoE) of 2.0%. However, whilst the immediate pressure on prices has eased somewhat, it doesn’t mean you should be complacent, and you should be looking to deal with inflation as part of your long-term financial plan.
Even low inflation eats into your savings
If inflation running at the BoE’s target of 2% doesn’t sound too bad, the reality is that the costs of goods and services will still be rising.
The inflation calculator from the BoE shows that goods costing £20 in 2014 would now cost £26.86 – a 34% increase. Even if the 1.7% were to continue, costs would be 18% higher in 10 years’ time. That could have a major impact on your financial plans – for example if you were planning a certain level of retirement income without factoring in the effects of inflation.
The table below further emphasises this, showing the rate of inflation in June of every year between 2019 and 2024.
| Date | Rate of inflation |
| June 2019 | 2% |
| June 2020 | 0.6% |
| June 2021 | 2.5% |
| June 2022 | 9.4% |
| June 2023 | 7.9% |
| June 2024 | 2% |
Source: ONS
And the reality is that since 1997, when the BoE gained its independence, the inflation target has been missed around 70% of the time, according to this article in FTAdviser, making the need for a proper financial plan even greater.
For guidance going forward, in the chancellor Rachel Reeves budget speech on 30 October, she stated that the OBR predicts CPI inflation will average 2.5% this year, 2.6% in 2025, then 2.3% in 2026, 2.1% in 2027, 2.1% in 2028 and 2.0% in 2029.
Incorporating inflation in your financial plan
Whilst you can’t be certain about how much inflation will affect your expenses and savings over the next 20 years or more, there are often steps you can take to incorporate it into your finances and provide security.
A key part of financial planning is understanding how to create long-term financial security. This involves considering how the value of your assets and your outgoings will change over time. Cashflow modelling can have a role to play here. It can help you visualise the effects of inflation over time and what you need to do reduce the potential impact.
Part of your financial planning should also look to consider how to:
- Create a financial buffer in case inflation is higher than you expect
- Grow your wealth at a pace that could match or beat the rate of inflation
- Use other assets to support your income during periods of high inflation
- Regularly review your short- and long-term finances to ensure they continue to reflect your current circumstances.
An effective financial plan can help you deal with both known and unknown outcomes, including the inflation rate.
Contact us to discuss how to incorporate inflation into your financial plan
If you’re worried about how inflation could affect your long-term wealth, please contact us. We’ll work with you to create a financial plan that reflects your circumstances and priorities.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. A pension is a long-term investment not normally accessible until 55 (57 from April 2028).
The Financial Conduct Authority does not regulate cashflow planning.