How Can You Protect Your Savings From Inflation?

Data from the Office for National Statistics (ONS) shows that the UK’s Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.8% between March 2023 and March 2024. For savers and investors, protecting the value of their money against the corrosive effects of inflation is a critical challenge. There are no straightforward solutions, but this article aims to provide a handful of practical tips that may help you – starting with a basic explanation of how inflation is defined and measured.

Understanding inflation

Inflation measures how much more expensive goods and services have become over a given period, usually a year. In the UK, consumer price inflation is tracked by the CPIH, which includes housing costs, and the Consumer Prices Index​. These indices help gauge the average price change faced by households nationwide.

Government saving schemes

The UK offers several government-backed saving schemes that can help protect against inflation. For instance, Index-linked Savings Certificates and certain types of National Savings and Investments accounts adjust the interest paid based on inflation, ensuring your investment grows at least in line with inflation rates.

Investing in indices

Trading stock indices through index funds or ETFs can also offer an avenue to hedge against inflation. Stock markets generally have a track record of outperforming inflation over the long term. For example, equity investments linked to the performance of the FTSE 100 or S&P 500 provide exposure to a diverse range of companies and industries, potentially offering returns that exceed inflation. Of course, it’s worth remembering that no form of trading is completely risk-free and there is always the potential of making a loss as well as a profit.

Investing in real estate

Property investment can serve as a practical inflation hedge. Buying property or investing in real estate investment trusts allows you to benefit from both capital appreciation and rental yields, which often increase with inflation.

Trading commodities

Commodities like gold, oil and agricultural products are traditional shelters against inflation. Their prices tend to rise when inflation increases, as they are direct inputs in goods and services. Investors can gain exposure to commodities through direct purchases, mutual funds or ETFs, which can help diversify investment portfolios and reduce risk.

To safeguard your savings from inflation, it is crucial to adopt a diversified investment strategy that includes a mix of asset classes. Monitoring inflation trends, as reported by reliable sources such as the ONS in the UK, can provide you with the insights needed to make informed decisions about where to allocate your funds​. As inflation fluctuates, staying informed and adjusting your investment approach accordingly is vital to maintaining the purchasing power of your savings.

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