Inflation and how it can affect your wealth

Understanding inflation and how it affects your wealth is crucial for creating an effective financial strategy. It can also help you understand how the value of your assets will change over the long term. As inflation isn't something you have control over, it can be difficult to calculate the effect it can have on your plans.

Is inflation good or bad?

A bit of inflation can be a good thing for the economy. It can encourage people to spend now as they expect prices to rise in the future. This in turn means businesses have the money to invest.

However, too much inflation can have the opposite effect. Rather than encouraging people to spend more, people may choose to delay spending either because they think they'll get a better deal by waiting or because they are worried about other costs increasing.

Maintaining the 'right' level of inflation is the responsibility of the BoE. The bank has a target of 2%. This is designed to stimulate the economy without encouraging people to hoard money.

Guide to Inflation

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Inflation

How does inflation affect stock markets?

A sudden spike in inflation can lead to market volatility because inflation signals uncertainty in the economy. This in turn can lead to a reluctance to invest which can impact on growth, ultimately, impacting share values.

Stock prices and stock market returns are largely based on expectations of companies' future earnings. As inflation erodes the value of currencies, this can make it increasingly difficult for the market to gauge the current value of the companies that make up the market indices. Rising costs of materials, inventory and labour can impact the earnings of companies all leading to fluctuations in stock prices.

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