Inflation ignorance

Inflation and spending power explained

Inflation is the rate at which prices rise. We all know that goods and services like bread, fuel and public transport get more expensive over time – that’s inflation at work.

Spending power is your ability to buy things. When inflation increases prices, your money’s ability to buy goods and services decreases. That means you’re losing spending power.

Saving smart: how interest rates reward you

When you put money in a savings account, you are leaving that money with the bank. The interest rate is the percentage of money that a bank pays you for leaving your money with them.

Here’s an example of how an interest rate grows your savings over 12 months.

We haven’t deducted any tax from your returns in this example. But you might pay tax on your interest depending on your circumstances and the account you choose.

How inflation affects your returns

In this example we’ve used the Government’s target 2% inflation rate, however in reality the rates of inflation and interest go up and down so the real return you receive will change over time.

Confusion can cost you

The HL Savings & Resilience Barometer reveals that people who understand how inflation works also have significantly better financial resilience. Seventy percent of them have enough emergency savings – that’s at least three months worth of essential expenditure – compared to just 44% of those who struggle with how inflation works. Plus, 46% of those who are informed are on track for a “comfortable” retirement – compared to just 22% of those who aren’t.

If you want to continue improving your knowledge, our glossary is a great place to start.

How to improve your interest rate

You may be worried about spending time searching different sites for better interest rates.

Active Savings can help.

It’s a savings marketplace. So you can get great rates from a wide range of banks and building societies we have partnered with, all in one convenient online account. No need to waste time visiting different sites.

You can pick and mix easy-access savings and fixed-rate savings and move your money around with a few clicks. No more forms, no more paperwork and no hidden surprises. Just simple, easy saving.

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