Inflation concerns today and planning for the future

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Inflation concerns

Inflation concerns are rising across the EU and in the UK. Inflation has been climbing steadily since last summer, hitting 8.1% in the Euro area in May and expected to climb to over 11% in the UK. Even low levels impact your spending power over time, so take steps now to protect your savings and retirement income for your long-term future.

Inflation has been a major news story this year but we don’t need to read news reports to know the cost of living is going up, we’re only too aware of our weekly shops and electricity bills.

This follows 10 years of benign, easy-to-ignore inflation, but in fact, we were not immune from it then. It is always there, slowly eroding the spending power of the Euro in our pocket and we should always be vigilant about how it impacts our financial security through retirement.

Although this inflation surge is lasting longer than first anticipated, and may get worse before it gets better, it is not expected to be long-term. But hopefully, people will view it as an eye-opener and take this long-term threat more seriously now.  We cannot predict what inflation will be in ten or twenty years’ time, but we do know that even low levels can seriously reduce your spending power over time if your money does not grow at the same rate.

The Eurozone

The Harmonised Index of Consumer Prices (HICP) was just 2% in May 2021. This May it is estimated to be 8.1% – up from 7.4% in April  and the highest rate in the history of the monetary union. When you compare HICP across the Euro area, Estonia suffered the highest inflation with 20.1%, while at the other end of the scale Malta has 5.6%.

Unsurprisingly highest component is energy, with 39.2% inflation, followed by ‘food, alcohol & tobacco’ with 7.5%.

  • French consumer prices, as measured by the local Consumer Price Index (CPI) reached 5.2% in May, up from 4.8% in April. Using the EU’s HICP methodology it was 5.8%, a new record. The government’s €25 million package capping gas and electricity prices has helped keep French inflation to the second lowest in the Eurozone.
  • In Spain, the CPI increased again in May, this time to 8.7%, after dipping from 9.8% to 8.3% in April.  The Bank of Spain now forecasts that inflation for 2022 will be 7.2% (a small improvement on its previous 7.5% forecast). It should then gradually drop to 1.8% by 2024.
  • The Portuguese CPI increased to 8% in May, up from 7.2% in April. This is the highest rate for almost 30 years.   While energy continues to be the biggest contributer (27.3%), unprocessed food was also high at 11.6%.  The government expects prices to decelerate over the second half of the year.
  • Consumer prices in Cyprus are climbing at the fastest rate in 40 years, hitting 9.1% in May. It is getting close to the highest rate of 10.8% recorded in 1981. The biggest price changes were in electricity (+40.9%), petroleum (+37%) and agricultural products (+10.9%) – fuel prices rose by 6% in May alone, the largest ever increase. Food and non-alcoholic beverages rose 8.6%.

Inflation concerns in the UK

In the UK, the Consumer Price Index soared to 9% in April, with household energy bills reaching record levels. In May it edged up slightly to 9.1% helped by rising food prices, particularly bread, cereal and meat. You have to go back 40 years to find a higher CPI rate.

Will inflation remain high?

When prices began rising last summer, that was largely caused by the ‘base effect’ (inflation the previous year had been unusually low in the pandemic) and supply difficulties as economies exited from lockdowns. However, the crisis in Ukraine then exacerbated the issues, particularly with energy prices escalating though uncertainty about supply chains has also pushed prices up.

Last month the European Commission revised its Eurozone 2022 inflation forecast upwards by a steep 3.5 points, to 6.1% for the year.  Its Spring Economic Forecast (released on 16 May) expects inflation to peak at 6.9% over the second quarter of 2022 and then start declining gradually. Average inflation for 2023 is forecast at 3.2% (in 2021 it was 2.9%).

Paolo Gentiloni, Commissioner for Economy, explained:

Russia’s invasion of Ukraine is causing untold suffering and destruction, but is also weighing on Europe’s economic recovery. The war has led to a surge in energy prices and further disrupted supply chains, so that inflation is now set to remain higher for longer. Last year’s strong economic rebound will have a lingering positive effect on growth rates this year. A strong labour market, post-pandemic reopening and NextGenerationEU should provide further support to our economies and help to drive public debt and deficits lower. This forecast is however subject to high uncertainty and risks that are closely linked to the development of Russia’s war. Other scenarios are possible under which growth may be lower and inflation higher than we are projecting today.”

In the UK, the Bank of England has issued bleaker forecasts. On 5 May it warned that inflation was expected to peak above 10% and not till the last three months of the year.  It then expected the CPI to fall to 1.3% in three years’ time.  At its Monetary Policy Meeting on 16 June it revised its inflation forecast and now anticipates the cost of living to climb to over 11%  this year.

In response to inflation, the Bank of England has raised its interest rate five consecutive times since December 2021. Its latest move on 16 June took interest rates to 1.25%, the highest since 2009 – but still a long way below inflation.

Inflation concerns for your savings and retirement income

No one is immune from inflation.  We all need to plan to protect our savings and future income from the rising cost of living. Making sure your money lasts as long as we do should be an integral part of our financial planning for retirement.

If you’re retiring now at age 60, you need to plan for over 30 years of retirement. Unless your savings grow each year, they will buy you considerably less as the years go by.

As a basic illustration, if you have €50,000 in a current account with no growth, and inflation is 3% every year, after 10 years its value will have fallen to around €37,000. After 20 years it’s around €27,500 and after 30 just €20,555.  That’s a 59% reduction in purchasing power.

You, therefore, need to invest in assets that can be expected to produce enough growth to at least keep up with inflation.  As we know from the last decade, bank interest rates cannot be expected to do this – in fact, many savers have been earning negative real rates of return.

While you may become more averse to investment risk in retirement, remember that inflation is also a big risk to your savings. You can reduce investment risk to comfortable levels by obtaining an objective calculation of your attitude to risk, then building a suitable well-diversified portfolio around your risk tolerance, time horizon, circumstances, and objectives.

Holding your investment portfolio within an arrangement that is tax-efficient in your country of residence helps protect your capital from unnecessary taxation as well as inflation. Review your financial planning annually to have peace of mind about your future, then get back to enjoying your retirement years.

Contact Blevins Franks today and learn more about protecting your savings and retirement income from the effects of inflation.

HICP/CPI inflation data is at 22 June 2022.

All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised investment advice.  The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance.


Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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