High Inflation – A Wake-Up Call for Savers

By Thomas McCoy

Higher inflation means the purchasing power of your money is falling and you need more of it to buy the same things.

In this blog, Castlefield adviser Thomas McCoy explains why high inflation should be a wake-up call for long-term savers, and how diversification can help combat some of its effects.

The ONS recently reported that UK inflation climbed to 3.6% in June —its highest in 18 months (UK inflation hits highest rate for almost a year and a half - BBC News).

While this might not seem catastrophic on the surface, for long-term savers and cautious investors sitting on cash, it spells real-terms capital erosion.

I often meet clients who believe that holding onto cash is “safe.” But in a persistently inflationary environment, that safety is an illusion. When inflation outpaces your returns, your purchasing power is shrinking, quietly but steadily.

A diversified investment portfolio is one of the most effective tools to preserve and grow wealth in today’s economic climate.

The Problem With Holding Too Much Cash

Right now, top savings accounts are paying around 4.5% and 5.0%. But with inflation pushing north of 3.6%, your “real return” (accounting for inflation) is marginal at 0.9% to 1.4%, and that's before factoring in taxation on interest.

typically the cash you hold today will buy you less next year and so shouldn’t form the bulk of any long-term savings plan

Even worse, if the Bank of England cuts rates in the next few months, as some expect due to faltering growth (Bank of England boss ready to cut interest rates if job market slows - BBC News), those savings rates will likely fall before inflation does.

On this basis, typically the cash you hold today will buy you less next year and so shouldn’t form the bulk of any long-term savings plan.

The case for Investments

When I talk to clients about building long-term wealth, the core principle is this: You don’t beat inflation with safety—you beat it with strategy.

A well-constructed portfolio balances growth, stability, and income.

Let’s take an example. A client, with £200,000 in savings earning 4.8% annually. This sounds great at first … until you assess out the “real return”:

  • Gross return: £9,600
  • Tax (as a higher-rate taxpayer at 40%, using their personal saving allowance of £500): ~£3,640
  • Net return: ~£5,960
  • Inflation impact (3.6% on £200k): ~£7,200

As a result, the purchasing power of these savings actually declines by around £1,240, despite the account balance rising.

When inflation outpaces your returns, your purchasing power is shrinking

Instead, one solution is to move a portion into a diversified investment portfolio. Although performance may not be guaranteed to be positive, or beat inflation over a single year, this gives the potential for capital growth above inflation over a long-term time period.

As a financial adviser, my role is to help clients achieve good outcomes with their money. In the current climate, that means recognising that cash, while essential for liquidity and emergencies, is not a long-term strategy to protecting or growing their assets.

Clearly, as part of any planning it’s sensible to have some level of cash to act as an emergency fund. This acts as a safety net to cover costs like job loss, medical bills, or home repairs without going into debt.  The recommended amount is often specific to your personal needs and situation, however a starting point is often to consider 3 to 6 months' worth of essential living expenses. As well as this, there may be other sensible reasons to keep a high balance of cash.

However, a diversified investment portfolio:

  • Preserves the purchasing power of your savings over the longer-term.
  • Offers tax-efficient growth.
  • Stays resilient in inflationary cycles.

If you’re holding more cash than necessary, consider speaking with a professional about reallocating in line with your goals, risk profile, and time horizon.

Because in a high-inflation world, doing nothing with your money is not risk-free, it’s a slow leak.

Written by Thomas McCoy

 

This article is intended for information purposes only and it does not constitute a personal recommendation or inducement to invest. It is based on information obtained from sources which we believe to be accurate but the accuracy of which we cannot warrant and may be subject to change at short notice, therefore we cannot be held responsible for the implications of relying on this information. The contents of this document are not intended to be construed as legal, accounting, tax or investment advice. With any investment your capital is at risk. You should seek independent financial advice if you are unsure whether an investment product is suitable for your personal financial circumstances and appetite for risk. Unless otherwise stated this information is accurate as at 17/07/2025.