How to manage your money as inflation just keeps rising

Uk inflation is at a 30-year high – and it won't be falling any time soon. So what can you do? John Stepek explains how to manage your money to combat rising prices.

Woman in a supermarket
Inflation isn't expected to peak until April
(Image credit: © TOLGA AKMEN/AFP via Getty Images)

UK inflation hit a fresh 30-year high last month – prices are now rising at a rate of 6.2% a year.

The Bank of England doesn’t expect that to peak until April.

Even if it’s right (and it hasn’t been right about inflation so far), inflation is going to stay at levels we haven’t experienced since the early 1990s for the entire year and beyond.

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So what, if anything, can you do about it?

Central banks really have made a mess of this

Be careful what you wish for, and all that.

Central banks have spent roughly a decade and a half being mortally afraid of deflation. The awful spectre of a modest decline in the general price level saw them shovel money into the system left, right and centre.

This didn’t do much about consumer prices, but it did send asset prices through the roof.

If you wanted to take a very narrow and slightly skewed but not entirely untrue view of things, your kids can’t afford to buy a house because central banks were scared that the price of clothes and electronic goods was falling too fast.

Anyway, inflation was already picking up even before the coronavirus hit. Central banks were even starting to think about not printing as much money.

Then Covid came, governments decided the best course of action was to shut down the global economy, and central banks responded in a predictable manner.

Now the process of restarting the economy has created a whole swathe of other problems, which have all been exacerbated by colossal amounts of money printing.

As a result, today we’ve still got unaffordable housing, but the price of everything else is going up rather too quickly for comfort as well. The consumer price index rose by 6.2% in February compared to last year. The retail prices index (excluding mortgage interest costs) rose by 8.3%.

Note that, if we were still living in 2002, rather than 2022, 8.3% is the number you’d be using, not 6.2%. It’s an interesting if not entirely enjoyable psychological exercise to consider how you’d feel if the big number was 2.1 percentage points higher than the one you’re told to pay attention to now.

Good job, monetary policy people around the world, good job. Slow hand claps all round for the interventionist tendency.

How can you attempt to survive and thrive against such a backdrop?

There are no easy solutions to soaring inflation – sorry

Here’s the long and the short of it – and it’s not a cheery conclusion.

If you’re an employee, you may well have received a pay rise this year that’s a bit larger than the one you got last year. The bad news is that your wages probably still aren’t anywhere near keeping up with current inflation rates unless you’ve recently moved job.

If you have cash in the bank – well, savings rates have been pitiful for ages, but now it actually matters. The “real” value of those cash savings is now being eroded at a rate of knots.

“Stick your money in stocks,” is the message you’ll hear from well-meaning (and not-so-well-meaning) industry people. That makes sense if you can lock your money up for a long time. It’s absolutely true to say that history shows equities deliver better returns (again, in the long run) than any other major asset class.

But it’s not as easy as that. For a start, there’s a lot to unpack in that idea of “the long run”. If you can’t put your money away for at least five years, investing in stocks means taking a significant risk that your money might not even grow in nominal terms, let alone “real” terms. At least with cash, you know you’ll get back what you put in, even if it can’t buy you as much.

Another, perhaps more important point, is this: on the whole, stocks don’t like inflation at these levels either. Yes, miners and oil producers and (depending on interest rates and stagflation risk) banks might work.

But lots of stocks don’t. That’s not just because of rising costs and what have you; the real problem with inflation is that it drives up the discount rate. This basically dictates what investors are willing to pay for a given level of earnings, and as the discount rate rises, the value of future earnings falls, and price/earnings multiples shrink.

So even solid companies which are more than capable of coping with rising inflation see their share prices fall.

As for bonds – they’re fixed-income assets in a world where you need more income just to run on the spot. It doesn’t take a genius to realise that inflation is not great for bonds.

My point is not to put you off investing; the point I’m making is that inflation makes managing your finances a lot harder. So don’t get suckered into “easy” fixes – this environment is an absolute dreamworld for scammers promising high-yielding investments in exotic assets, for example.

You have to think harder and you have to be more active about it – not just in investment terms, but also in terms of thinking about where you can trim costs on your personal finances.

My colleague Cris looked at how you might put together a portfolio of cheap funds with some inflation protection built into it.

And again, just to remind you – you should try to take advantage of your tax breaks where you can get them right now. So if you haven’t used your Isa allowance (or your pension allowance) yet this year, make sure you do. We had some suggestions as to how to use it in the latest issue of MoneyWeek magazine.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.