Inflation is the source of much debate at present. The current Consumer Price Index (CPI) shows prices rising twice as fast as the Bank of England’s target, whilst the Retail Price Index (RPI), which excludes mortgage interest payments, is rising even faster.
Inflation is almost certainly going to remain fairly high in the near future, whilst interest rates are unlikely to rise significantly in the short term.
You might well be thinking, SO WHAT? Inflation poses a serious risk, as it erodes both the capital value of investments and the income from them.
Of course cash remains an important safety net, and everyone should maintain some sort of instant access emergency fund to cover unforeseen circumstances, and expenditure planned over the short term. However, with interest rates looking like they will stay low and inflation running at 4%, cash is losing its value in real terms. Many investors need to consider taking some risk to at least maintain wealth.
As an alternative, you might consider National Savings and Investments (NS&I) Index-Linked Savings Certificates. Having been withdrawn in July 2010 due to over-subscription, a new issue has recently gone on sale. The new issue has a fixed term of five years, and pays a return of 0.5% above the rate of inflation (RPI), and savers can lock away between £100 and £15,000.
This newsletter article is for information purposes only and should not be viewed as advice. The correct course of action for any given situation is always subject to your individual circumstances and therefore you should always seek professional advice before making any decisions.
Levels, bases of and reliefs from taxation can vary and their value depends on the individual circumstances of the investor.
The Financial Services Authority does not regulate National Savings and taxation advice.