How Inflation Destroys Your Wealth
Inflation is a term that we hear often nowadays, but many of us don’t fully understand what it means or how it affects our finances.
In simple terms, inflation is the rate at which the general level of prices for goods and services is rising, and as a result, the purchasing power of your money is decreasing.
Inflation can have a significant impact on your wealth, and in this article, we will explore how inflation destroys your wealth and what you can do to protect yourself.
What Causes Inflation?
Inflation is caused by a variety of factors, including an increase in the money supply, rising production costs, and increased demand for goods and services. One of the primary causes of inflation is an increase in the money supply. When the government or central bank prints more money, (I like to think of this as a silent tax or creeper tax) there is more money in circulation, which can lead to an increase in demand for goods and services. This increase in demand can cause prices to rise, leading to inflation.
Another factor that can contribute to inflation is rising production costs. When the cost of producing goods and services increases, businesses may need to raise their prices to maintain their profit margins. This increase in prices can lead to inflation.
Finally, increased demand for goods and services can also contribute to inflation. When there is a high demand for goods and services, businesses may raise their prices to take advantage of the increased demand. This increase in prices can lead to inflation.
How Does Inflation Affect Savings?
Inflation can have a significant impact on your savings. Money held in savings accounts hasn’t grown much in previous years due to historically low interest rates. But with inflation now running high, your savings are at risk of losing value in ‘real’ terms as you’ll be able to buy less with your money.
Let’s say you have £10,000 in savings, and the inflation rate is 3%. In one year, the purchasing power of your savings will decrease by £300. Over time, this can add up to a significant amount of money lost to inflation.
How Much Money Am I Losing to Inflation?
The amount of money you are losing to inflation depends on the rate of inflation and the amount of money you have saved. The most used measures of inflation in the UK are the consumer prices index (CPI), the consumer prices index including owner occupiers’ housing costs (CPIH), and the retail prices index (RPI).
According to the Office for National Statistics (ONS), the CPIH inflation rate was 8.8% in January 2023 (the unofficial rate is over 10%). So if you believe the governments ‘official figures‘, this means that if you had £10,000 in savings, the purchasing power of your savings would decrease by £880 in one year.
Let’s look at that in a chart over 10 years. For context, this chart reflects a balance presuming the annual inflation rate remains at 8.8%. This figure can go up as well as down. For historical reference, the Consumer Prices Index inflation hit 25.3 per cent in August 1975, after the decade finished it was still at 15.6 per cent in April 1980, nearly double that of the ‘official’ figure today but closer to the unofficial figure.
| Year | Starting Balance | Annual Inflation | Ending Balance |
|---|---|---|---|
| 1 | £10,000.00 | -£880.00 | £9,120.00 |
| 2 | £9,120.00 | -£818.50 | £8,301.50 |
| 3 | £8,301.50 | -£743.42 | £7,558.08 |
| 4 | £7,558.08 | -£664.59 | £6,893.49 |
| 5 | £6,893.49 | -£581.68 | £6,311.81 |
| 6 | £6,311.81 | -£494.68 | £5,817.12 |
| 7 | £5,817.12 | -£403.27 | £5,413.85 |
| 8 | £5,413.85 | -£307.35 | £5,106.50 |
| 9 | £5,106.50 | -£206.72 | £4,899.78 |
| 10 | £4,899.78 | -£101.72 | £4,798.06 |
As you can see from the chart, the initial deposit is losing value each year due to the inflation rate of 8.8%, which is based on the CPIH inflation rate. The ending balance of each year is the starting balance minus the amount lost due to inflation. After 10 years, the initial deposit of £10,000.00 has decreased to £4,798.06, which means the investment has depreciated by £5,201.94 over the 10-year period due to inflation.
It’s worth noting that this chart assumes that the inflation rate remains constant at 8.8% for a decade, and that there are no additional deposits or withdrawals made to the account during the 10-year period. If the inflation rate were to change or there were additional deposits or withdrawals, the actual ending balances in each year may differ.
What To Do With Savings During Inflation?
If you want to protect your savings from inflation, there are several things you can do. One option is to invest your money in assets that tend to perform well during periods of inflation. These assets include commodities like gold and silver, real estate, and selected value stocks.
Gold and silver are often considered safe-haven assets during times of economic uncertainty. They tend to hold their value and preserve wealth well during periods of inflation and can provide a hedge against inflation.
Real estate is another asset that tends to perform well during periods of inflation. As the cost of living increases, so does the value of real estate.
Value stocks can also be a good investment during periods of inflation. Companies that produce goods and services that people need tend to perform well during periods of inflation. Additionally, companies that have pricing power, meaning they can raise their prices without losing customers, tend to perform well during periods of inflation.
How To Protect Wealth From Inflation?
There are several ways to protect your wealth from the governments inflation. One option is to move a portion of your wealth out of the banking system and invest in assets that tend to perform well during periods of inflation, such as gold and silver, real estate, and value stocks. Traditionally, another option is to invest in bonds, which tend to perform well during periods of inflation but sadly not in todays environment.
One risk of investing in bonds is that they are sensitive to interest rates. When interest rates rise, the value of bonds tends to fall. However, bonds do provide a fixed return, so they can help protect your savings from inflation. If you invest in bonds with a higher return, it’s possible to offset the loss in purchasing power due to inflation. Finding bonds with a higher return than inflation is key.
Conclusion
Make no mistake, inflation destroys your wealth, and it’s worthwhile to understand the causes of inflation and how it affects your savings. You’ve worked hard to build a nest egg. Don’t let it inflate away to zero. Inflation can lead to a decrease in the purchasing power of your money, and if you don’t take measures to safeguard yourself, your savings could suffer in real terms over time.
To protect yourself from the effects of inflation, consider investing in assets such as precious metals, and real estate that have the potential to appreciate over time. By taking these steps, you can protect your finances and your wealth in the long term.
Disclaimer: I would never tell anyone what to do with their money, I only share what I’m doing with mine. This is not financial advice, I’m not a financial advisor. Please do your own due diligence and do something. Don’t let inflation destroy your wealth.
How Inflation Destroys Your Wealth
Perry Stevens is the founder of BIGPriceDrops and a long-time digital marketer with a practical interest in helping UK shoppers find better value online. He focuses on clear, no-nonsense money-saving content, Amazon UK deal insights, and buyer guides that help readers spot genuine savings without falling for misleading discounts or impulse-buy traps.
When he is not working on BIGPriceDrops, Perry runs Blend Local Search Marketing and works on digital projects covering SEO, AI tools, and online business growth. His approach is simple: help people make smarter decisions before they spend their money.
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