What Is Inflation, Really? And How Does It Affect Your Wealth?

Introduction

We hear about it constantly — “Inflation hits X%”, “Cost of living crisis”, “Price rises outpacing wages”. But what actually is inflation? And more importantly: how does it impact your everyday finances, your savings, and your future goals?

Understanding inflation isn’t just about headlines — it’s about protecting and preserving the real value of your money.
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What Is Inflation?

Inflation is the general increase in prices over time.

When inflation rises, each pound you hold buys slightly less than it did before. Over a year or two, this might seem minor — but over a decade, it can significantly erode the value of your savings or income if left unchecked.

Example:
If inflation is 5%, something that cost £100 last year would cost £105 this year — even if your income hasn’t changed.

What Causes Inflation?

Several factors can drive inflation, including:

• Rising energy or commodity prices
• Increased demand for goods or services outpacing supply
• Currency devaluation
• Wage increases, passed on through higher prices
• Government policies, such as quantitative easing or fiscal stimulus

In 2022–2023, for instance, a combination of global supply chain issues, rising energy costs, and economic recovery post-COVID contributed to sharp inflation across the UK and Europe.

How Does Inflation Affect Your Wealth?

1. Cash Loses Value
   Money held in low-interest savings accounts may not keep pace with inflation — meaning its real value is quietly shrinking.
2. Fixed Income Suffers
   If you rely on a fixed income (like a pension or annuity), inflation can reduce its purchasing power over time unless it's inflation-linked.
3. Borrowing Becomes Relatively Cheaper
   Interestingly, inflation can erode the real value of debt — especially if your interest rate is fixed. What you owe stays the same, while money becomes less valuable.
4. Assets Can Act as a Hedge
   Investments such as equities, property, and inflation-linked bonds can offer protection — as their value often rises over time with inflation.

What Can You Do?

You don’t need to panic — but you do need a strategy. Here are a few practical steps:

• Review where your cash sits. Is it earning interest that at least partially keeps up with inflation?
• Diversify your portfolio. Equities, property, and certain real assets can help hedge long-term value.
• Keep goals inflation-adjusted. £500,000 today won’t have the same buying power in 20 years. Plan accordingly.
• Check pensions and income streams. Are they designed to grow with inflation?

“Inflation is taxation without legislation.”

‍— Milton Friedman

Conclusion

Inflation may be silent — but it’s not harmless. Left unaddressed, it slowly eats away at your financial stability. With the right strategies, however, you can not only preserve your wealth — but grow it in real terms over time.

At Life Smart, we help clients structure their portfolios and plans to stay resilient — regardless of what the markets, headlines, or price tags are doing.