What high inflation means for you

Harvey Jones 5 November 2021

With the return of high inflation, there are concerns for what this might mean for mortgages and investments. Read on for how it can affect you

The 1970s was the era of fun things like ABBA, Star Wars and Tupperware parties, but it was also a time of surging energy prices and rampant inflation. ABBA and Star Wars are still lots of fun, and Tupperware has its uses, but nobody wants to see high energy prices and inflation stage a comeback. 

Or even worse, stagflation, that combination of stagnant growth and high inflation that menaced the Seventies generation. Unfortunately, that is exactly what's happening…

Back to the 1970s

Gas, electricity and petrol prices are going through the roof, while the Bank of England predicts inflation will hit 4% this year and top 5% in 2022. Most younger people have never known a period of sustained inflation, so it will be a new experience for them. Those who recall the 70s will be not be keen on taking a trip down memory lane.

Inflation: not so groovy

Inflation shopping basket

When inflation rises, central bankers are forced to increase interest rates, to stop price growth from running wild. Every time the Bank of England increases base rate by 0.25%, homeowners with a tracker mortgage will see their interest charges rise by the same amount—so will most people sitting on their lender's standard variable rate.

When this happens, each £100,000 of mortgage will cost an extra £250 a year to service—or £20.83 a month.If the Bank hikes base rates four times—1% in total—each £100,000 of mortgage will cost £1,000 a year extra, or £83.32 a month. 

That could prove a struggle for those who have already borrowed to the max. Especially as prices and taxes are also set to climb, with the new 1.25% National Insurance levy due from April.

Get yourself into a fix

If worried, protect yourself by taking out a fixed-rate mortgage. At time of writing, best buy two and five-year fixes charge around 1%. That is still incredibly low by historical standards.

Today’s rock bottom deals will not last much longer if inflation takes off, and lenders are already pricing in rate hikes.

Talk to a mortgage broker and compare rates. However, if you already have a mortgage, confirm you are free to leave, as many deals impose early redemption charges in the first few years. Think twice about remortgaging if you risk incurring these. Also, decide whether fixing is right for you. It might not be if you plan to move home in the next few years.

Yet more bad news for savers?

Savers have endured more than a decade of near-zero returns, but if interest rates rise, so will returns on cash. The downside is that they will not rise as fast as inflation, so the value of money held on deposit will still fall in real terms.

All you can sensibly do is keep an eye on the savings market and shop around for the best rates. You can get a higher return by locking into a fixed rate bond for between one and five years, but if inflation takes off, today’s leading fixed rates may suddenly look paltry.

Shares can help you fight inflation

For long-term savings that you do not need for at least five years, invest in the stock market. Cash tends to perform poorly when inflation rises, but shares do better, albeit with greater volatility along the way. Otherwise cross your fingers and hope the inflation revival will prove “transitory”, as many central bankers insist. 

Like the 1970s, it will pass…

Read more: What refugees would say to their younger selves

Read more: It's a Mann's World: Mattress Madness

Keep up with the top stories from Reader's Digest by subscribing to our weekly newsletter