Christmas is expensive…

Fifty years ago, the top-selling toys included a space hopper, an Etch-a-sketch, and clackers!

Nowadays, you’re likely to see some more expensive gifts, such as games consoles, or iPhones under the tree – the average family spends almost £740 more in December than in the rest of the year. Books sales double, and spending on food and alcohol see huge increases.[1]

But this year, families will feel the pinch a bit more. Because, after a very long time on the side lines, inflation is back.

What does this mean for your Christmas? And, perhaps more importantly, how will inflation impact your long-term financial plans?

We’ve already seen the signs this year…

Inflation is at its highest level since 2011 – the result of rising gas costs, supply-chain disruption and higher petrol prices. At Christmas, whether it’s spending on gifts, festivities, or travel to see loved ones – it’s impossible to ignore.

With food prices seriously impacted by inflation, the cost of Christmas dinner will be higher this year. One calculation puts the average cost of turkey and the trimmings at nearly £30, more than 3% up on a year ago (and a frozen turkey is 7% more expensive).

Gifts too are pricier. One piece of research from comparison site Finder showed that UK adults are spending £548 more per person in 2021 – a £72 increase from the year before. That’s despite more people saying they won’t be sending gifts this year, and more than two-thirds saying they were finding ways to reduce their Christmas budgets.

So, has creeping inflation stopped people shopping? It doesn’t look like it. In fact, it appears many are hitting the high street or going online earlier. Reports before Black Friday (the pre-Christmas discount spending spree ‘borrowed’ from the US) was that Britain was on course for record sales of £9.2 billion. Shoppers trying to get an inflation-busting cheap deal before Christmas, or people spending more because last year was such as damp squib?

What’s the long-term picture?

Of course, a little inflation is a good thing. Spending helps drive the economy forward. Without it, more of us would be tempted to wait it out and hold off buying the non-essentials until there was a fall in price.

Too much inflation though and the economy could be in trouble. That’s the reason the Bank of England is likely to start raising interest rates soon (it was thought the first rise would come at the end of this month, but uncertainty over the latest Covid variant appears to have put this on hold).

All this can be a headache when thinking about your financial future. If inflation and interest rates erode the value of the pound in your pocket, it becomes harder to achieve your financial goals.

Financial planning helps you deal with the risk of inflation

This is where making a financial plan becomes so important. While having your money in a bank or savings account is advisable for known expenditure or emergencies, putting money aside for the longer term requires a rate of return above inflation.

Diversifying your capital – for example investing in the stock market, which tends to outpace inflation over longer periods – can help protect your capital from being eaten away by inflation.

Speaking to a financial planner adviser can help you find the most sensible ways to allocate money to reach your long-term financial goals, such as planning for your retirement.

So should we be concerned about inflation? There’s a couple of things to remember:

  • Firstly, the rise in inflation in recent months should only be temporary. The Bank of England has previously said it expects inflation will peak at 5% by spring. This should be helped by the pandemic beginning to subside and economies starting to return to normal.
  • Secondly, interest rates will eventually rise, but they are still low. We’re talking half a percent (they are currently at an ultra-low 0.1%). Nothing compared with the level in the ‘70s and ‘80s, when rates were regularly above 10%.

We try to model and forecast the long-term inflation picture, but no one can predict the exact course. After a long time out of the general conversation, inflation is definitely a talking point once again – but having a clear financial plan means it is hopefully one less thing to worry about.

[1] Bank of England