The UK’s economic situation is not news to its citizens now. Since the end of 2021, Britain has endured a dangerous economic landscape, one which has proven particularly damaging for lower- and middle-income households across the nation.
Rising costs, from Brexit-incurred tariffs to chocked natural gas supply, have seen the rate of inflation skyrocket and remain high for well over two years.
As of May 2023, the CPIH inflation rate was recorded by the Office of National Statistics at 6.5% – its highest rate since the early 1990s. Meanwhile, the CPIH all goods index stood at a 9.7% increase from May the previous year.
The rate of inflation has remained high despite Bank of England’s predictions that it would fall significantly, with profound impacts on businesses, industries, and citizens.
The high rate of inflation has a pseudo-devaluing impact on the pound sterling, ensuring that money stretches much less further than it should.
Impact on Households
The high rate of inflation has had major impacts on households, in two distinct ways. For one, the cost of goods has increased significantly and disproportionately, with some grocery items inflating by nearly a fifth of their value.
For another, government and Bank of England responses to rising inflation have seen interest rates rise – on savings, and, more importantly, debts.
Altogether, these issues increase the probability of a household taking on unsustainable debt – whether in the form of credit cards and payday loans to cover wage shortfalls, or as a result of negative equity in a recently-purchased home.
This could be catastrophic for the millions impacted – but what can be done to address these potential impacts?
How to Mitigate Impacts
It is clearly not easy to navigate the world in which there is always another possibility for money to lose value. Inflation is not easy on anyone so the right strategies to overcome it are absolutely necessary. Consider the following:
The first step for any household looking to shore up their financial situation should be to eliminate existing debts. Debts are much more costly than their face value, as interest over time continues to wick away any potential savings – and as a higher risk of non-payment over time increases the risk of forfeiting collateral.
For households with multiple lines of credit or outstanding debts, it makes the most sense to gather all the debts under one lender. Consolidating debts simplifies the task of repaying them, creating a single monthly payment at a single rate of interest.
This makes budgeting to eliminate debt much simpler. Speaking of which:
Budgeting money is a skill that not everyone possesses – but is an essential one to learn in times of economic crisis such as this. Careful budgeting is not only necessary to manage rising household costs about utilities and supermarket costs but also when it comes to saving for the longer term.
Investment Over Savings
A more complex route to mitigating inflation impacts comes in the form of investing. Saving money in conventional savings accounts will not see savings accrue in line with inflation; even though interest rates are higher, they are not in line with the rate of inflation.
Investment, though, such as in a global index fund or property, can beat inflation and allow you to grow your savings post-debt at a much quicker rate – albeit with more risk.
Diversifying Income Streams
In times of rising inflation, it becomes essential to explore alternative sources of income to counter the impact on household finances. Diversifying income streams can provide a buffer against inflationary pressures by reducing reliance on a single income source.
Consider taking up a side hustle, freelancing, or starting a small business to generate additional income. By diversifying your income streams, you create a more resilient financial ecosystem, enabling you to better withstand the effects of inflation.
Exploring income opportunities that have the potential to grow alongside inflation, such as investing in stocks or real estate, can help protect your purchasing power in the long run.
Strategic Purchasing and Consumer Behavior
Inflationary periods call for a shift in consumer behavior and more strategic purchasing decisions. It’s important to be mindful of price increases and make informed choices when it comes to buying goods and services.
Look for alternatives or substitutes for items that have experienced significant price hikes. Prioritize essential needs over wants and consider delaying non-essential purchases until prices stabilize.
Take advantage of discounts, sales, and bulk buying opportunities to save money in the long run. Adopting a frugal mindset and becoming a savvy shopper can help mitigate the impact of rising inflation on your household budget.
Preparing for Long-Term Inflationary Effects
While it’s crucial to address the immediate impacts of rising inflation, it’s equally important to plan for the long term. It can have enduring effects on the economy, and being prepared is key.
Consider investing in assets that historically provide protection against inflation, such as real estate, commodities, or protected securities. These investments have the potential to preserve purchasing power over time.
Review your retirement savings and ensure they are adequately diversified to account for inflation. Keep an eye on forecasts and adjust your financial plans accordingly, including retirement goals and investment strategies.
By taking a proactive approach and preparing for long-term inflationary effects, you can safeguard your household’s financial stability.
Rising inflation can pose significant challenges for households, but by implementing the right strategies, you can navigate through these difficult times. Mitigating the impacts of inflation requires a multi-faceted approach that includes reducing debt, careful budgeting, and prioritizing investments over savings.
Diversifying income streams, adopting strategic purchasing behaviors, and preparing for long-term inflationary effects are crucial steps to ensure financial resilience.
It’s important to stay informed about economic trends, seek professional advice when necessary, and regularly review and adjust your financial plans to stay ahead.
By implementing these strategies and maintaining a proactive mindset, you can protect your household’s financial well-being and weather the storm of rising inflation.