Inflation - the effect on savings

Bank and building society and other deposit-type investments may seem 'safe' and they are, in as much as your capital is not exposed to the same risks it'll face from investing in something stockmarket-related. But looks can deceive! If you were receiving (say) 4% after tax from your savings account, but the annual rate of inflation was continually running at 5%, it's true to say every year your savings would lose value.

Even a modest inflation rate can wreak havoc over time. Say you put £10,000 under the mattress and inflation is running at an annual rate of 2%. After 15 years, your money will have the purchasing power of just £7500. So, to protect the real value of your capital and the income it provides, you need to consider investments which can give you capital growth as well as income.

You might want to look at stockmarket-related investments or consider investing in Index-linked government stocks (gilts) or Index-linked National Savings certificates that protect you from inflation.

Investing in shares gives you more risk but also - potentially - a greater chance of beating inflation. Over the longer term, shares tend to outperform other types of investments such as deposit accounts. However, this is by no means a certainty.

As a rule, investments such as property have in the past tended to perform well in times of rising general inflation, whereas investments paying a fixed rate of return, such as gilts tend to do less well.

See also: UK Inflation history Inflation- Definition RPI Index Rossi Index

Last Updated: November 2007 © Moneyextra.com

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