Inflation is a word we all know – and dread. Like a rollercoaster with no endpoint, the UK economy has been in a state of fluctuation that makes it harder to predict inflation. Whether navigating soaring prices or low interest rates, being able to manage the storm of a shifting economy is essential, reducing the risk of stress and ensuring greater financial stability.
Inflation is the measure of how much goods and services are going up over time. Popular conversation topics around inflation include the rising price of a Cadbury’s Freddo bar, the loss of the 99p McDonald’s Saver’s Menu, and the inequitable cost of a pint. Though these types of products often rise faster than inflation, they still act as an accessible gateway for understanding how goods and services increase year-on-year.
An inflated impact
Inflation is more reliably measured by Consumer Prices Index (CPI), Retail Price Index (RPI), and Consumer Prices Index with Housing (CPIH)[i]. When the cost of common products (food, alcohol, clothing, housing expenses) or services rise, the rate of interest for cash savings accounts lowers. Higher interest rates bring down inflation because there are higher payments on mortgages and loans, meaning people must spend more on them and less on other things.[ii] Higher interest rates also mean that savers get more return on their money and potential borrowers find it more expensive to take out a loan – spending therefore becomes a less attractive prospect, and businesses are likely to control their prices, rather than raise them. When this happens, inflation falls.[iii]
Decreasing inflation sees a rise in interest rates, bolstering savings. However, the higher the interest rate rises, the higher the amount lost to tax will be, depending on your Personal Savings Allowance (PSA).[iv] If an account has £100,000 and enjoys a 6.5% interest rate, it will be worth £106,500 after a year. But, if the account owner is on the higher tax rate and pays 40% in tax, only £500 of that will be part of the tax-free PSA, and £2,400 will be taken off in tax. For cash ISAs or stocks and shares ISAs, the interest is tax free.
Where to put your money
Deciding where to put savings is ultimately a choice between risk and stability. When savings rates drop, you can either weather the storm in the economic sanctuary of a fixed rate account, or ride it by switching between the best accounts or buying into investment funds. With a fixed rate savings account, money is locked away and maintains a constant interest rate (e.g 4% over a year). This makes budgeting and financial planning more predictable. On the other hand, the money cannot be withdrawn without closing the account and/or paying an early access charge. As such, this should not be an emergency savings pot and is better utilised for leftover savings.
From risk to reward
Non-fixed savings options, such as ISAs, instant access savings accounts and stocks and shares are riskier but can also be more rewarding. Buying into investment funds is recommended to diversify and spread money across multiple avenues. This could instead mean moving 40% of savings in property, 30% in equities and 30% in fixed-interest securities. Within the equities you may wish to diversify further, buying stocks for businesses across different sectors. From IT and technology to clothing brands or entertainment, broadening your investments means that changes in the economy may not affect all of your assets.
Companies that are worth investing in can be broadly categorised into two options. First are the pricing power businesses that do well in times of rising inflation, like food, drink and drug companies. Second are those with a strong brand loyalty that will flourish even if their prices are increased due to inflation. Overlap between these two is likely to be a good choice. Wherever your investments go, it is worth staying in the market for a long period to lower the risk of short-term price movements and improve the long-term outcome.
For highly reliable support in managing your savings during turbulent economic times, seek the assistance of money4dentists. With over half a century of financial expertise, the team of independent financial advisers have access to the latest information and resources, ensuring that your money is in the place that most suits your needs. Trust the capable hands of money4dentists to maximise your savings.
From small but sudden surges in economic growth to periods that have cratered near recession, inflation in the UK has long been a struggle to navigate. Take the steps needed to protect your savings by diversifying your assets today.
For more information, please call 0845 345 5060.
Email info@money4dentists.com or visit www.money4dentists.com
Authors: Richard Lishman and Sarah Guilford
[i] Office for National Statistics (2019). RPI All Items Index: Jan 1987=100 – Office for National Statistics. [online] Ons.gov.uk. Available at: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/chaw/mm23.
[ii] Bank of England (2025). What are interest rates? [online] www.bankofengland.co.uk. Available at: https://www.bankofengland.co.uk/explainers/what-are-interest-rates.
[iii] Bank of England (2025). What are interest rates? [online] www.bankofengland.co.uk. Available at: https://www.bankofengland.co.uk/explainers/what-are-interest-rates.
[iv] Gov.uk (2024). Tax on Savings Interest. [online] Gov.uk. Available at: https://www.gov.uk/apply-tax-free-interest-on-savings.
