20 ways to beat inflation

Published by Ruth Jackson on 03 May 2017.
Last updated on 03 May 2017

We are all feeling the pinch, as prices – from food to petrol – keep climbing higher. But there are still plenty of ways to minimise the impact of inflation on your spending power and your long-term savings.

The plunging value of the pound due to fears over Brexit combined with rising food and fuel prices, means our money is losing value faster than it has done for years. Inflation is once again a real concern.

The consumer prices index (CPI) rate of inflation was 2.3% for the year to March (the latest data), exceeding the government’s inflation target for the second month in a row.

CPI had already made a shock rise to 2.3% in February, higher than the Bank of England’s 2.05% forecast. Many expected rising food and fuel prices to cause an increase in the rate of inflation, but the surprise came in the news that the ‘core’ inflation rate – one that excludes food and fuel – rose to 2%.

“Inflation for cultural and recreational goods, especially personal computers, rose sharply,” says Ruth Gregory, an economist at macroeconomic research company Capital Economics. This is “perhaps an early sign that the effects of sterling’s fall are feeding through more quickly than had been anticipated”.

The worry now is that this is just the beginning of an upward trend. While it’s far too early to know if inflation will hit the dizzying heights of the 1970s when it reached 25% in 1975 and averaged 13% a year across the decade, it does seem as though the only way is up.

Everyday expenses such as food, petrol and energy will be the areas where consumers feel the impact of inflation most. Plus, savers may be particularly affected as interest rates remain at rock bottom. Bank of England policymakers expect the inflation rate to reach as much as 2.8% in the first half of 2018, which means there could be further struggles for savers ahead.

How the £1 coin ‘shrank’ to 32p

The new £1 coin that launched earlier this year – its first revision since it was introduced in 1983 – is a good case study on the power of inflation. Insurance company Aviva has worked out that in terms of pricing power – the value of goods and services that money will buy you – £1 will purchase one-third of what it could in 1983.

At 34 years old, the pound coin has a relative purchasing power of only 32p, compared
to the purchasing power of £1 in 1983. So if the Bank of England wanted
the new coin to have the same purchasing power as it did in 1983, it would be revalued as the £3.10 coin.

So what can you do to beat the ‘silent thief’ that could steal your disposable income and erode your hard-earned cash over the long term? We have put together 20 tips to help ease the burden of rising inflation.

Everyday expenses

Fuel prices hit an 18-month high at the start of the year; they’ve fallen back slightly since then, but you are still paying more to fill up than you were a year ago. The average price for a litre of petrol is currently £1.20, compared to £1.03 a year ago.

Tip 1: Cut fuel costs, by going to website Petrolprices.com to find the cheapest petrol pumps in your area.

The Big Six energy firms have in recent months been announcing price rises averaging 8%, way above CPI.

Tip 2: Get cheaper energy bills by paying direct debit and check if another provider can offer you a better deal. Use Moneywise’s free energy tool (www.moneywise. co.uk/compare-energy-prices- comparison) to check if you can save by switching.

Some of the best ways to combat rising food costs are obvious: make a shopping list, buy own-brand items and compare prices according to price per weight rather than the labelled price.

Tip 3: Use comparison website MySupermarket.co.uk, which compares prices at all leading supermarkets to see where your basket of shopping will be cheaper.

Savings rates

While prices are moving steadily up, savings rates are going nowhere. Low interest rates also magnify the impact of rising prices, as our money will buy even less over time. For example, if you put £50,000 in a savings account five years ago that paid 1% interest, it would have grown to £52,551 now. That’s £2,551 worth of interest, right?

Unfortunately, due to inflation, you would need £54,984 to buy the same things as you could have bought with £50,000 five years ago. In real terms, your money’s spending power has shrunk by £2,433.

If you want your savings to keep pace with inflation, you need a bank account paying at least 2.3% interest. Ideally, an individual savings account (Isa) so your returns aren’t affected by tax, but with the new personal savings allowance you may be better off with a standard savings account.

Tips 4-12: 10 accounts to beat 2.3% inflation. There are a small number of regular savings accounts which pay more than inflation – but all require you to have a current account with the provider.

Consumers with a 4 First Direct current account, 5 HSBC Advance or HSBC Premier account, 6 M&S Bank current account, 7 Nationwide Flex account or 8 Santander 123 account can access linked regular savings accounts offering 5% interest. 9 Lloyds Bank’s Club Lloyds account holders can also access a 3% regular saver with their bank. However, these accounts also have limits to the amount holders can pay in each month.

Current accounts could be a better bet for your savings – especially if you want easy access. The 10 Nationwide FlexDirect account pays 5% interest on balances up to £2,500 for the first year, but this drops to 1% thereafter.

11 Tesco Bank offers 3% on balances up to £3,000, while 12 TSB also pays 3% interest on its Classic Plus current account – but only on balances up to £1,500. Remember that you have to meet certain requirements, such as minimum pay-ins, to get these accounts.

Tip 13: Play current account ping pong. The majority of current accounts limit interest to balances of under £5,000, but there is a way to play the banks and make more. Current account ‘ping pong’ sees savers bounce money between numerous current accounts to make the most of in-credit interest (and any bonuses for signing up) and to gain access to any linked regular savings accounts, which offer higher interest rates for a year in return for monthly saving.

In a recent poll, 58% of the 1,113 Moneywise.co.uk users who voted said they use more than
one current account at the same time to boost their savings, adding that they plan to continue doing this in 2017.


The latest hike in inflation has led to speculation that the Bank of England will increase interest rates, which could be a double blow for mortgage holders.

With the cost of living rising but the value of our money staying the same, times are hard. But, for mortgage holders, if the government does decide to increase interest rates to slow inflation, it could actually get worse.

Those mortgage holders who are sitting on their lenders’ standard variable rate (SVR) will face an increase in their repayments when rates rise, so finding a good remortgage now could be the best option.

But how likely is an interest rate rise? The general consensus is that while the Monetary Policy Committee will not rush straight into a rate rise as a result of the inflation hike, it will probably raise rates this year.

“The Bank of England has made it clear that household spending is one of the key measures it’s looking at when deciding where interest rates go from here,” says Laith Khalaf, senior analyst at Hargreaves Lansdown.

“The odds on an interest rate rise are now close to even stevens. One dissenting voice in the latest Monetary Policy Committee decision to keep interest rates on hold was pounded upon as evidence of the start of a shift in policy.”

Tip 14: Get off your lender’s standard variable rate. With more than a third of homeowners currently sitting on their lender’s SVR, a rise in interest rates could put a serious dent in their wallets, according to London & Country (L&C) Mortgages. Inflation could see us all having
to part with more money to buy the essentials, one way to recoup some of that cash could be to remortgage off that SVR.

“With the cost of living on the rise and day-to-day expenses such as energy prices soaring, it is hugely concerning to see that people are paying so much more than they should be,” says David Hollingworth, associate director at L&C Mortgages.

For the past eight years, homeowners have benefited from record low mortgage rates. But mortgage rates are starting to slowly rise now, meaning it could be time to opt for a fix and lock in a low rate before they disappear.

Do remortgage if...

  • You like the security of a fixed rate. Fixed-rate mortgages mean you know exactly what you’re paying each month. If you aren’t on a fixed-rate deal, you may be enjoying cheap repayments now, but they could rise and if the rate starts rising there’s no telling how quickly and how high it will go.
  • You would not be able to handle base rate rises. If you’re just about getting by at the minute and any rate rises would leave you unable to make ends meet, then you should be looking at fixed rate mortgages now.
  • You want to avoid future interest rate uncertainty. There are plenty of events on the horizon, which could affect inflation and interest rates, including Brexit and the prospect of a Scottish referendum. If you opt for a long-term fixed rate deal now, say for five or even 10 years, you will lock in a rate that means your mortgage repayments won’t be affected if political uncertainty has a knock-on affect on interest rates.

Don’t remortgage if...

  • You did so recently. There have been some great low rates around recently so if you recently remortgaged onto a super low tracker rate, and you are happy to risk – and can afford – higher repayments if interest rates do rise, you may want to stick with what you’ve got.

Tip 15: Fix your mortgage repayments for the long term. There are still some incredibly good long-term fixes available which could allow you to secure a low fixed rate for five or even 10 years. This would mean you could avoid any interest rate turbulence over the next two years as Britain journeys out of the EU.

At the moment, it’s still relatively cheap to fix your mortgage repayments for the longer term. The best deals are available for well under 3%. However, monthly repayments are much higher than shorter fixes, so it only makes sense if you expect rates to rise in the next few years.

Our example mortgage hunter is looking to remortgage on their £200,000 property, and will be looking to borrow £100,000 over 15 years – so they’re looking for a 50% loan tovalue(LTV)deal.Ourbuyerhas decided to pay fees upfront to avoid being charged extra interest.

Based on these circumstances, our two best buys are:

  • HSBC, up to 60% LTV, 1.94% Fixed until 30 June 2022 then reverts to SVR (currently 3.69%)

The rate is 1.94% – fixed until 2022 – and there are no fees. That will cost £641 a month and £7,724 each year. Our buyer will revert to a standard variable rate – currently 3.69% – after this fixed period.

  • First Direct, up to 60% LTV, 2.49%

It is fixed for 10 years then reverts to SVR (currently 3.69%). If you’re willing to lock in for
10 years, then this deal from First Direct comes with a low 2.49% rate and £35 fee. The repayments will be £666 a month, or £8,013 on an annual basis.


If you want to focus on your long- term future plans, many believe that the risks of not investing in the stock market are even greater than the risks of investing.

Warren Buffett, one of the world’s most successful investors, stresses that inflation is the real threat to your savings – and it is stock market investments, or equities, that are best placed to deliver inflation-busting returns.

The key evidence is analysis of more than a century of stock market returns from the Barclays Equity Gilt Study 2017, which shows that since 1899, Barclays UK shares – as measured by the Barclays UK Equity Index – have produced an average annual ‘real’ (above inflation) return of 5.1%. That compares with 1.2% for government bonds (gilts) and 0.8% for cash.

Not many of us have a 100-year investment horizon, but the same holds true for shorter periods. Over 50 years, equities have produced average real returns of 6% a year, while gilts have delivered 3%. Over 20 years, the respective figures are 3.7% and 4.5%.

Over the past 10 years, however, cash has delivered a negative real return of -1.3% (see table above).

Tip 16: Consider moving some savings into investments. Ultimately, if you have a lot of money in the bank, say £50,000 or more, you won’t be able to beat inflation with all of it. But over the longer term, if you move some of that money into higher risk investments, there’s potential for greater total returns that could outpace inflation.

Gilts (government bonds) and, to a lesser degree, corporate bonds, look particularly vulnerable to rising inflation. This is because they pay a fixed rate of income that buys less as inflation eats into it – although there are inflation-linked bonds that try to counter this.

Tip 17: Invest in companies that produce consumer staples. As far as investing in company shares, also known as equities, is concerned, companies that produce real things that people will buy regardless of price, such as big food retailers, tobacco companies, utilities companies and pharmaceuticals, look the safest bests.

“These are all defensive industries which are best placed to perform in difficult economic times,” says Patrick Connolly, spokesperson for financial planning firm Chase De Vere.

Tip 18: Invest using Moneywise's First 50 Funds for beginners. Among Moneywise’s First 50 Funds for beginners, there are two global growth funds that are well known for investing in consumer brands.

  • Fundsmith Equity: The fund’s manager, Terry Smith, seeks good- quality businesses, which he believes will deliver strong cash flows into the future, regardless of the economic background. His approach has tended to result in a bias towards companies with a strong brand or franchise, and those which own significant intellectual property, such as patents, trademarks and copyrights.
  • Lindsell Train Global Equity: The fund’s managers, Nick Train and Michael Lindsell, believe there is a collection of companies with wonderful brands, franchises and unique market positions, which can reward investors handsomely over the long term. Go to www.moneywise.co.uk/first- 50-funds.

Pension pots

Inflation is rapidly eroding away the value of our pensions and experts are warning pension holders to be more astute to avoid losing out in the long term.

Kate Smith, head of pensions at Aegon, says: “A rise in price inflation should set alarm bells ringing, reminding people that their buying power can change over a relatively short period of time and this can be particularly hard for those on fixed incomes, including many pensioners.”

She adds: “Increasingly, people are living 20 or more years in retirement and even low-level inflation can erode the value of retirement income over time. In under 20 years the value of £100 has more than halved, which could severely restrict pensioners’ spending power and quality of life.”

Tip 19: Buy some inflation protection for retirement. An annuity can still form a useful part of your retirement planning, as it offers a guaranteed income for life. One option might be to use part of your retirement savings to buy an annuity that covers your essential expenditure.

Inflation often hits pensions hardest when they are used to buy an annuity – or a regular income – in retirement. This is because the vast majority of annuity holders buy level (unchanging) annuities, rather than escalating or index-linked annuities that increase each year. A level annuity promises a greater yearly income to start with. However, that amount will never change.

If you are buying an annuity, it’s possible to opt for one that’s index- linked, rising in line with inflation each year. Alternatively, escalating annuities go up annually by a set percentage such as 3% or 5%, to protect your money from inflation.

Although your money is protected, the initial income you receive with both these options will be a lot lower than a straightforward level annuity.

Given how long it takes for an inflation-linked annuity to catch up with a more standard annuity, you would have good reason for wanting to stick with a straightforward level annuity that guarantees a set income for the rest of your life. However, you have to question how long you expect to get an income from an annuity.

If you start at 65 and live to over 100 years old, you are looking at nearly 40 years you need to cover. In that time, inflation could have gone up dramatically and if you’ve tied yourself into a set rate there’s nothing you can do to stop inflation eating away at your retirement income. If, however, you had an index–linked annuity your money would be protected.

Given the uncertainty over future inflation rates, hedge your bets by going for a combination with part of your annuity index or inflation- linked and the other part level.

Tip 20: Keep investing into retirement. The good news is anyone approaching retirement won’t be forced to buy an annuity anymore. Instead, you can keep some or all of your retirement savings invested and draw an income from them at the same time.

The problem with this is you remain exposed to the highs and lows of the stock market.

If your pension is still invested, then the key is to opt for assets that offer inflation-busting growth – but without taking on more risk than you are comfortable with.

“People need to think seriously about how to use their savings to outrun the corrosive impact of inflation,” says Ms Smith. “Stocks and shares have historically kept better pace with inflation, so are an option for those willing to take some risk and diversify their savings from cash.”

In order to make sure you have a regular income to cover your essential expenditure, you could choose to use only part of your retirement savings to buy an index-linked annuity while keeping the rest invested. That way, you get the best of both worlds – peace of mind that you will always be able to pay your bills combined with a pension pot that is still growing.

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