Welcome back to Smart Investor.
I'm Clare and as always I'll be guiding you through getting to grips with your investment choices.
Today we'll be focusing on inflation, how it works and how it can impact you as a saver or investor.
Remember, we can't offer personalised advice so if you feel you need more help, please seek independent financial advice.
Inflation is essentially the rate of increase in the prices we pay for goods and services we use.
There are two main measures of inflation the Consumer Price Index and the Retail Price Index or CPI and RPI for short.
Both of these look at the cost of our everyday expenses such as food, drink and going out.
However, RPI also factors in housing costs such as mortgage interest payments and council tax, whereas CPI doesn't.
Several factors can push up inflation.
Rising commodity prices can have a major impact particularly higher oil prices as this means steeper petrol costs for consumers.
This can have further knock-on effects for us as individuals as it impacts transport costs for businesses which can mean the costs of the goods being transported have to rise as well.
Stronger economic growth can also push up inflation as increasing demand for goods and services places pressure on supplies which may in turn lead to companies raising their prices.
As you can see from this graph inflation is currently at its highest level since 2013 so it's really important to understand the effect it has on your finances.
Inflation is bad news for savers, as it erodes the purchasing power of your money.
Low interest rates also don't help, as this makes it even harder to find returns which keep pace with higher living costs.
To put it into context, say you want to buy a coat that costs £100 but you decide to hold off on the purchase and keep your money in savings instead.
If next year inflation drives the price of that coat up to £103 the £100 you have in your savings account won't allow you to make the purchase unless the interest you've earned was in line or higher than inflation.
The £3 in this particular example might not seem like much but when all of your living expenses increase over time this can have a major impact on your monthly outgoings.
The effect is amplified if your savings can't keep up with inflation rates.
Leaving all of your cash in a savings account could see it lose its value over time.
And for this reason, it's a good idea to explore options which might be able to provide you with better protection against inflation such as investments in stocks and shares.
Over the longer term, stock markets tend to perform better than cash giving you a better chance of achieving returns that beat inflation.
However, investing does carry additional risk as the value of your investment can fall as well as rise so you do need to bear this in mind.
And it's really only suitable if you have money you can invest for five years or more as this should hopefully give you time to ride out the ups and downs of the stock market and recover all you invested so that you end up with a better return than if you'd kept all of your savings in cash.
Thanks for watching and if you'd like to find more information or watch any of our other episodes of Smart Investor please visit our website.
See you next time.
