Financial Planning

How to shield your finances from inflation

How to shield your finances from inflation

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.

Inflation is often called the “silent killer” of wealth and finances. This is because it erodes the spending power of your money over time. If, say, inflation rises by 5% in a given year but your cash only grows 0.5% in your regular savings account, then your money buys 4.5% fewer goods than in the previous year. You have lost money in real terms, even if your bank statement might show that your account has grown with interest.

In this article, our financial planning team at Cedar House offers some thoughts on how to shield your finances from inflation in 2022. We hope you find this content useful. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:

020 8366 4400 or


Inflation in 2022

2022 has become a defining year for inflation in many western countries. In the UK, it currently stands at 7.1% according to the Retail Prices Index – the highest rate since March 1991. This is significantly higher than the 2% target set by the Bank of England (BoE). In the USA, moreover, inflation has hit 6.2% which is a fresh high since June of 1982. Not only does this put greater pressure on households whose income cannot stretch as far, but it also raises the possibility of higher interest rates – increasing the cost of UK government borrowing.


Keep appropriate cash reserves

As mentioned, inflation erodes the value of your assets over time. At a minimum, these should aim to “keep” up with inflation (e.g. in terms of capital growth, or interest gained). Here, cash is producing notoriously low returns in today’s low-interest rate environment. It is difficult to find a regular savings account which comes close to 1%, let alone the 2% BoE target. 

However, with inflation now over 7%, savers need to think carefully about how much cash they hold. We tend to suggest holding 3-6 months of living costs in an easy-access savings account, in case you encounter hardship (e.g. redundancy). However, holding large cash sums could be incurring you a large “opportunity cost”. Consider speaking to your financial planner to find out whether this could be better-deployed elsewhere.


Inflation-linked bonds

Which assets can you turn to if you are looking to counter inflation? Broadly speaking, most investors have the option of shares (equities) or bonds. The former we cover below. The latter refers to a type of “IOU”, where you lend money to a bond issuer (e.g. the UK government) who promises to pay you back with interest.

Bonds are often attractive to investors with a lower investment “risk appetite” and whose priority is to preserve their wealth (e.g. people approaching retirement). However, their lower risk profile means that bonds tend to offer lower returns than equities. So, whilst bonds may be better than cash as a long-term investment, they can still fall behind inflation.

One way to address this is to consider inflation-linked (or index-linked) bonds. These raise their repayments to investors according to inflation. However, these are not a “magic bullet” to protect your portfolio. Consider, for instance, that UK inflation-linked ten-year government bonds (gilts) currently nearly at maturity yield a negative real yield of -3.2%. Bond yields do vary according to interest rates, market forces and the maturity date. If you are interested in this area of investing, please speak to a financial planner who can advise you.


Equities & inflation

Another investment option is company shares (equities) which tend to offer higher returns than bonds – albeit at higher risk and volatility. The S&P 500 index, for instance, comprises the top 500 US-based public companies and has returned an average of 10.5% since its 1957 inception through to 2021. However, such returns are not guaranteed and past performance is not proof that these will replicate in the future.

A strong equity portfolio can be a powerful inflation hedge which helps you grow wealth over long periods of time. However, the volatility of the stock market means that you need to prepare for many bumps along the road. If you think you will need the money in the near future (e.g. in under 5 years), then you may want to consider diversifying into other, safer assets. If you are saving for a house deposit and plan to buy in a year or two, for instance, it might be better to think about other options.

Over longer periods of 10, 20 or more years, however, equities have the potential to not only match inflation but provide good returns on top of this. For those wanting to invest towards their retirement, for instance, this is a good asset class to think about. Make sure that your portfolio is appropriately diversified across different sectors, industries and national markets to mitigate the risks unique to any one of them. A financial planner can assist you with this.



Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:

020 8366 4400 or


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