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How To Beat Inflation With The IFISA

After the Office for National Statistics (ONS) reported a surprise dip in October, the beginning of November saw the National Institute for Economic and Social Research (NIESR) announce that inflation is set to quadruple in the second half of next year to 4%.

17th November 2016

After the Office for National Statistics (ONS) reported a surprise dip in October, the beginning of November saw the National Institute for Economic and Social Research (NIESR) announce that inflation is set to quadruple in the second half of next year to 4%.

The biggest enemy to savers is inflation. Rising prices means that invested funds have to work harder in order to maintain their purchasing power.

Investors have already been hard hit by the lowering of bank interest rates to 0.25%. The predicted rise in inflation means that, at a minimum, invested funds will need to accrue a minimum of 4% in order for them to not depreciate in value.

The only way for savers to counter this risk is to seek out investments in higher yielding asset classes, such as our IFISA, which has an average 8.7% APR.

Using our platform, and managing your risk by investing in a portfolio of different companies, is likely to help you overcome rising inflation and grow your investments.

What Is Inflation?

Inflation is the price we pay for goods and services and is often linked to currency changes, consumer spending and the state of the market more broadly.

The prices we pay for things can also be affected by other global macroeconomic factors, such as the price of commodities like oil and gas.

It is calculated by The Consumer Price Index (CPI) and the Retail Price Index (RPI). The CPI is based on measuring the cost of the most commonly purchased household goods. The RPI differs in that it also takes into consideration housing costs such as mortgage interest payments and council tax.

Why Is Inflation Increasing?

Inflation is increasing due to the movement of the British pound sterling against overseas currencies. Since the vote to leave the EU, the pound has fallen around 20% against the dollar and 15% against the euro as the markets deem that EU member states will fall out of favour with the UK, which will restrict opportunities to trade.

Many UK companies procure components for their products from overseas, meaning that they are exposed to these currency movements.

These increased costs can either be passed onto the consumer, or can result in products being modified. Take the recent outcry (no, not Trump reigning over The White House), with Toblerone chocolate bars widening the gaps between those famous Swiss triangles, citing increased product costs as the driving factor.  And Unilever, which has raised the prices of a number of their products by around 6% to maintain competitive advantage as the cost to import their ingredients continues to rise.

One of the single biggest contributors to inflation is oil. All goods imported will have associated oil costs, which are priced in dollars. Additionally, this will push up the price of petrol, which directly effects everyday consumers too.

Why Does It Matter?

Inflation has implications for individuals as well as the wider economy.

If wages are not increased in line with inflation, this puts pressure on spending due to households having to consider saving by purchasing less.

Earlier in the year it was forecast that the economy would grow by 1.7% in 2017. However, rising inflation will now make this harder to achieve.

Traditional High Interest Savings Accounts And Cash ISAs Don’t Offer The Returns Needed

Unless you expect a pay increase at a minimum of 4%, the most effective way to protect against the threat of rising inflation is by investing in asset classes that generate a return with a minimum of this percentage.

At present, very little mainstream products offer this without taking any real risk. Holding money in a bank account will yield a return of less than 1%, whilst the buy tables for Cash ISAs shows that the most competitive, easy access products on the market offer returns of up to just 1.1%.

So what can I do to protect myself?

To withstand inflation pressures people need to be savvy and invest smarter – the IFISA could provide the answer…

Due to the low interest environment, individuals will have to change their mindsets to become investors rather than savers.

Investing in our IFISA is currently one of the most compelling solutions on the market to protect against inflation.

The average APR per company is currently 8.7%. Whilst our IFISA is not risk free, investing across a range of different companies should sufficiently spread your risk.

Additionally, high returns are aided by investors allocating funds directly into the companies on the platform, rather than through a middleman who takes a cut.

The ISA wrapper also means that funds are able to grow tax free and benefit from compounding interest.

In this current low interest, low return environment you should review your investments to make sure that they are working hard enough for you. You may also consider transferring existing low yield ISAs to the IFISA.

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Risk warning

Past performance and forecasts are not reliable indicators of future results. Your capital invested is not covered for compensation in the event of a loss by the FSCS. Tax treatment will depend on the individual circumstances and may be subject to change. Please see our Risk section before making an investment decision.