Please see below the latest financial update from Blevins Franks.
Please do not hesitate to contact Paul should you have any questions related to this or other financial matters.
https://www.blevinsfranks.com/inflation-update/
Inflation update and planning ahead to protect our savings
By Paul Montague, Partner, Blevins Franks
928 433 411 | canaryisles@blevinsfranks.com | www.blevinsfranks.com
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. The situation is improving now, but with variations across the continent. Spain and Cyprus have seen the Consumer Price Index return to normal levels, while in the UK it only dropped below 8% in June.
EU inflation
Across the European Union as a whole, inflation peaked at 10.6% last October and has since fallen to 5.5% in June. 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 now expects inflation to continue to slow from June’s 5.5% as energy prices fall, food inflation moderates and supply bottlenecks ease. Under current projections however, inflation will remain about the bank’s 2% target through to 2025. After 2022’s 8.4% inflation, the bank now forecasts it will be to 5.4% this year, 3% next year then 2.2% in 2025.
These are average rates for the Euro area and inflation levels vary across the member countries. Germany saw prices increase by 0.3% in June, to 6.4%, but elsewhere inflation continues to fall.
Spain’s Consumer Price Index returned to ‘normal’ levels (i.e. close to the 2% target) in June, falling from May’s 3.2% to just 1.9%. Thanks to lower fuel and electricity prices, transport and housing inflation are 7.6% and 12.7% lower respectively than in June 2022 (so negative inflation). Food inflation remains high at 10.3%, but it is improving.
Cyprus also recorded 1.9% inflation for June, much lower than the 10.9% it peaked at in July 2022. It is now at its lowest level in 25 years. The largest price change was in the food and non-alcoholic beverages category although it is still 10.1%. At the other end of the scale transport inflation was -10.3%.
In Portugal, inflation has been falling for eight months, after hitting 10% in October 2022, with the Consumer Price Index recorded at 3.4% for June. The index for unprocessed food is 8.5%, a small improvement from the previous month.
The France Consumer Price Index was 4.5%, compared to 5.1% in May. Food prices increased by 13.7% compared to 14.3% the previous month.
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
The UK has endured persistently high inflation, but in June the Consumer Price Index resumed a downward path and finally fell below 8%. In welcome news, the 7.9% rate announced on 19 July was lower than expectations.
This is the lowest inflation has been since March 2022, though still far above the 2% target and it remains the highest in the G7 group of advanced economies.
This lower June rate was significantly helped by falling fuel prices. Food inflation, however, remains stubbornly high at 17.4%, but it is down from May’s 18.3%.
Earlier in July, Bank of England governor Andrew Bailey had acknowledged consumer prices inflation still “unacceptably high”, but should fall “markedly” over the second half of this year.
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 building 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 which provides holistic strategic financial planning advice and which can integrate your investment planning with your tax and estate planning.
CPI data as at 19 July 2023
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
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