Published on 16 June 2021

Inflation moves higher with latest data showing a rise of 2.1% in the 12-months to May 2021. With rock bottom interest rates, invest in your ISA and SIPP if you want to stay ahead.

The latest data from the consumer prices index (CPI) – a measure of inflation – is out and inflation is rising. It showed in the 12-months to May prices rose 2.1%, jumping from 1.5% in April and 0.7% in March. Watch our jargon buster if you want a 30 second refresher.

Furthermore, the longer term picture shows inflation is a permanent factor to contend with. Central banks target 2% inflation to keep economies ticking over and stop them slipping into more damaging deflation. Data from interactive investor show this to be true. Over the past 20 years, the average rate has been 2.01%.

Becky O’Connor, Head of Pensions and Savings at II, says: “Money held in savings accounts is currently losing value as a result of inflation. Rising inflation can be devastating for those trying to retain the value of their life savings. It is particularly a problem for retirees who want to preserve their capital as well as maintain an income from their pension.”

Myron Jobson, Personal Finance Campaigner at II, adds: “Those who were made unemployed or suffered a loss of income as a result of the pandemic will feel the rise in the cost of everyday spending the most. To make matters worse, anecdotal inflation, the rise in the cost of things that we actively spend money on – like petrol and food – is even higher, compounded by the various commodity shortages.”

How can I stay ahead of inflation?

Jobson continues: “There are a number of practical steps to protect your finances from the inflationary pinch. Consider repaying any outstanding debts you may have while interest rates remain low. The best approach is to clear your most expensive debt first. If you can’t afford to clear your debt outright, explore opportunities to refinance or consolidate loans into better deals. Fixed rate loans could work best amid the prospect of rising interest.”

“It is also worth rethinking how much you have in cash savings. It remains good practice to keep a rainy-day fund to tide you over when times are tough financially. Three months’ salary is a good rule of thumb. However, the value of cash savings is eroded by the rising cost of living in real terms amid the current ultra-low interest rate environment.”

“Rock bottom savings rates, further eroded by inflation, provides the impetus to invest.”

Which investments are best?

Investing tax efficiently through your ISA and SIPP can help you beat inflation. Data compiled by II on investment returns over 20 years highlights various places to go hunting. Company shares did well, with global equities (shares) returning 6.49% per year, and UK equities 4.61%. Gold and index-linked bonds (bonds with payments linked to inflation) are also classic inflation hedges, and returned 10.66% and 7.09% per year respectively.

While analysts remind us not to expect these sorts of heady returns in the future, it shows investing can be an essential tool.

Jobson finishes: “Investing can be volatile on a day-to-day basis and while the potential for greater returns from the stock market comes with inevitable risk, taking a long-term view means you can smooth out some of those highs and lows whilst benefiting from the long-term potential that comes with this approach.”