Our inflation update looks at how the costs of living is faring now in Europe, after two years of high inflation. Hopefully, we will continue to see improvement over the coming months and years, but it remains important for retired people to plan for the long-term rising cost of living.
It has been two years now, since inflation began to climb and we were soon noticing the higher cost of living. Prices continued rising over the following year, peaking in the autumn across much of Europe, but we have seen improvement since then. Food inflation however, while slowly decreasing, remains in double digits in many areas.
EU inflation update
Across the EU as a whole, inflation peaked at 10.6% last October and has since fallen to 4.9% in September (provisional data). So on average, EU prices were 4.9% higher than in September 2022). For the euro area it is 4.3%. Prices have been largely driven, both up then down, by energy costs.
Commodity prices initially began rising over 2021 as a result of recovering global demand. Then Russia’s invasion of Ukraine pushed prices up further in 2022, causing energy inflation to hit a record 44.3% high in the Eurozone. Food prices were also significantly impacted, reaching a historic high of 15.5% this March.
The European Central Bank expects inflation to continue to slow due to easing cost pressures and supply bottlenecks, as well as the impact of monetary policy tightening. Under projections published this September, headline HICP [harmonised index of consumer prices) inflation is expected to decrease from an average of 8.4% in 2022 to 5.6% in 2023, then 3.2% next year and 2.1% in 2025, reaching the 2% target in the third quarter of 2025.
These are average rates for the Euro area and inflation levels vary across the member countries.
Spain’s Consumer Price Index (CPI) returned close to the 2% target in June, falling to 1.9%. However, it returned to an upward path in July and was 3.5% in September. Food inflation remains high at 10.5%.
Cyprus also recorded 1.9% CPI inflation for June but it was back to 4% in September. Inflation for the food and non-alcoholic beverages category was 9.7%. At the other end of the scale transport inflation was -2.02%.
The France Consumer Price Index was 4.9% year on year in September, the same as the previous month. Energy prices accelerated (+11.9% after +6.8%) but was compensated by food prices slowing (+97% after +11.2%).
In Portugal, after falling for eight months from 10% in October 2022 to 3.1% for July, the Consumer Price Index recorded 3.7% in August and 3.6% in September. The index for unprocessed food was 6% in September, while the annual rate of change for energy products was in negative territory at -4.1%.
Unless they are negative, falling inflation rates do not mean that prices are falling, it just means they are rising less slowly than they were 12 months previously. The cost of living remains higher than it did back when all this started in 2021.
UK inflation update
The UK endured persistently high inflation for longer, but in June the Consumer Price Index resumed a downward path and finally fell below 8%. There was a sharper drop in July with a 6.8% annual rate of change, followed by 6.7% in August and September. This is the lowest inflation recorded since February 2022, though still far above the 2% target.
Food inflation remains stubbornly high at 12.2% in September 2023, but it is down from 13.6% in August and a recent high of 19.2% in March 2023.
The Bank of England expects inflation to fall markedly over the rest of 2023, to around 5% by the end of the year. Its August Monetary Policy Report explains that:
“Higher interest rates will help to reduce the demand for goods and services in the economy. And this will help slow the rate of inflation down further”, adding “We expect inflation to keep falling next year and meet our 2% target by early 2025”.
Inflation and your savings and retirement income
We will all breathe a sigh of relief when inflation, including food inflation, returns to normal levels again, but should not become complacent about the inflation risk and how the rising cost of living affects us over time, particularly once we’re retired.
While the impact of high inflation is quickly noticeable, low inflation is insidious. It seems harmless at the time, but slowly but surely, compounded over the longer term, it erodes the spending power of your savings and income.
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.
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. 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.
You, therefore, need to invest in assets that are usually expected to produce enough growth to at least keep up with inflation over the medium to long term. Although bank interest rates have now risen in response to inflation, we saw over the last decade or so how easy it is to earn negative real (inflation-adjusted) rates of return from banks.
While you may become more averse to investment risk in retirement, remember that inflation is also a big risk to your savings. Reduce investment risk to more comfortable levels by calculating your attitude to risk, then build a suitable well-diversified portfolio around your risk tolerance, circumstances, and objectives.
Working with a wealth management adviser to follow a disciplined investment process:
- Establish your goals and time horizon.
- Determine your attitude to risk – your adviser should take you through a suitability process to calculate this objectively.
- Construct a suitable, well-diversified portfolio to achieve your investment plan and objectives.
- Use quality investment managers.
- Review your portfolio annually to keep it on track.
- Be patient and stick with your plan – it is time in the market, not timing the market, that is likely to help you achieve your longer-term goals.
Holding your investment portfolio within an arrangement that is tax efficient in your country of residence will help protect your capital from unnecessary taxation as well as inflation.
Seek advice from an advisory firm that provides holistic strategic financial planning advice and which can integrate your investment planning with your tax and estate planning. Blevins Franks have expert financial advisers backed by investment specialists and in-house teams of pensions and tax advisory service personnel.
Contact us today.
CPI data as at 18 October 2023. CPI figures are the annual rate of change, comparing prices to the same month in 2022.