Why is inflation bad news for your savings?

Over the last few months we have heard concerns about inflation pushing ahead in the short to medium term and the potential impact this could have on the UK savings market. So why is inflation such bad news for your savings?

The truth is that we are in a relatively unique situation in the UK, and indeed around the world, where base rates are only just above zero which has led to very low savings rates, and inflation is starting to pick up. Inflation is basically the rate at which your savings, and your income, need to increase on an annual basis to maintain the same spending power. If your savings rate is higher than inflation then your spending power would increase and if you're savings rate is lower than inflation your spending power will decrease. However, it is also a little more complicated in the long run!

While ultimately you may argue that a bout of high inflation and low savings rates will not have a long-term impact on your spending power, you need to appreciate the cumulative impact this could have. If your spending power falls by 1% in year one then that would mean you have effectively 1% less money to invest for the next year and if it was to fall by 1% again then you would fall further and further behind your initial level of "spending power". It is the investment of the increase in your savings which also impacts upon your additional spending power in the future, something which is not always visible on the surface.