Understanding Inflation and How It Affects Your Savings

Disclaimer: This article is not financial advice. For guidance on your savings and investments, please consult a Financial Adviser.

What Is Inflation?

Inflation refers to the gradual rise in prices of goods and services over time, reducing the purchasing power of money. It is typically measured by comparing the cost of everyday essentials, such as food, transport, and utilities, with their prices a year ago. The percentage change in these costs is known as the inflation rate.

For instance, inflation currently stands at 3%, which means that prices are, on average, 3% higher than they were a year ago. A loaf of bread that cost £1 last year would now be priced at £1.03.

The Consumer Prices Index (CPI) is the primary metric used to measure inflation in the UK. The Office for National Statistics (ONS) collects approximately 180,000 price points each month across a representative ‘shopping basket’ of around 700 items to determine the inflation rate.

Latest UK Inflation Trends

According to the most recent ONS data, the CPI increased by 3.0% in January 2025 compared to the previous year. This marks a rise from December’s 2.5% rate and slightly exceeds market expectations of 2.9%. Key contributors to this increase include transport costs, food, and beverages, while housing and household services prevented an even steeper climb.

Dr. Andrew Bailey, Governor of the Bank of England, commented:

• "Inflation remains a key focus for monetary policy. While it has been easing in recent months, fluctuations due to external pressures mean that we must continue monitoring closely."

Although inflation has remained below 3% since March 2024, the January rise underscores ongoing economic pressures. Notably, core inflation—which excludes volatile elements such as food, energy, alcohol, and tobacco—rose from 3.2% in December to 3.7% in January.

What Does 3% Inflation Mean for Your Money?

If your money is kept in a standard current account with little to no interest, inflation effectively erodes its value. For example, £10,000 today would require £10,300 in a year’s time to maintain the same purchasing power if inflation remains at 3%.

Even seemingly moderate inflation levels can have a substantial impact over time, particularly when compounded. With the current inflation rate at 3%, money that remains stagnant in a non-interest-bearing account is gradually diminishing in real value.

How Savings and Investments Can Help

During inflationary periods, it could be considered a good idea to explore financial options that can help maintain or grow the value of your money. While it’s wise to keep an emergency fund accessible, allocating a portion of your savings into interest-bearing or growth-oriented financial instruments may help counteract inflation’s effects.

Rachel Springall, Finance Expert at Moneyfacts, advises:

• "Savers should regularly review their options to ensure they are getting the best rates possible. Whether through fixed-rate savings, ISAs, or investment portfolios, having a proactive approach is key to staying ahead of inflation."

Exploring savings accounts that offer competitive interest rates, alongside investment opportunities aligned with personal financial goals, can help mitigate inflation’s impact. While financial markets can fluctuate, a well-structured approach to saving and investing can prevent money from losing value over time.

Considering Your Options Carefully

Balancing accessibility, risk, and return is crucial when deciding where to allocate funds. Different financial products come with varying levels of risk, and returns are never guaranteed. Traditional savings accounts offer security but may not always keep up with inflation, whereas investment vehicles carry potential for higher returns but also come with associated risks.

As financial consultant Martin Lewis notes:

• "A balanced approach to savings and investments is crucial. Keeping emergency savings in easy-access accounts while exploring inflation-beating investment opportunities can provide both security and growth."

Final Thoughts

With inflation currently at 3%, understanding how it affects your savings is essential. Leaving funds in a low-interest account could see their real value decline over time. By exploring competitive savings accounts and investment opportunities suited to your financial needs, you can work towards safeguarding your money’s purchasing power and potentially achieving growth.

References

Bank of England. (2025, January 17). A Central Banker’s view of global challenges and expectations for the Bretton Woods Institutions’ response [Speech]. Retrieved from

Coles, S. (2023, February 14). How you could beat inflation with your savings in 2023. Hargreaves Lansdown. Retrieved from .

GB News. (2025, January). Inflation set to rise again next week: What does it mean for savings? [Interview with Sarah Coles].Retrieved from.

The Guardian. (2025, February 19). Bank of England faces bumpier road after inflation accelerates [Interview with Martin Lewis].Retrieved from.

Disclaimer: This blog is for informational purposes only and does not constitute financial advice. Investment opportunities are not suitable for everyone. Past performance is not indicative of future results. The value of investments may go down as well as up, and you may not get back the amount you invested. Moneda Capital does not offer financial advice, and all decisions should be made considering your financial circumstances and objectives. Investors should consider seeking independent financial advice before making any financial decisions.